Fitch Ratings Downgrades Tata Motors With Negative Outlook
Tata Motors downgrade reflects an expected reduction in its profitability, free cash generation over the next 2-3 years.
Fitch Ratings Inc. on Wednesday downgraded the ratings of Tata Motors Ltd. to ‘BB-’ from ‘BB’ and also lowered the outlook to negative, citing rising risks to its already poor profitability and free cash generation.
The Tata Motors downgrade reflects an expected reduction in the firm’s profitability and free cash generation in the next two to three years, Fitch said in a note. The rating agency had on Feb. 6 placed the automaker’s long-term issuer ratings of ‘BB’ on negative ratings watch. It had downgraded Tata Motors’ British subsidiary Jaguar Land Rover Automotive Plc on July 16
“Fitch revised its estimates because business risks have increased in both its India operations and in JLR, while the parent company is likely to invest more to bolster its long-term competitiveness. This will result in sustained deterioration in the financial profile, including the leverage,” the note said.
The negative outlook reflects the limited rating headroom, given the expectation of elevated leverage on a consolidated basis, and risk of further deterioration in profitability and leverage.
“Uncertainty around an orderly outcome of Brexit negotiations and the evolving global tariffs situation pose risks, in particular to JLR business, which faces a significant level of production-sales mismatch due to concentration of its production base in Britain,” Fitch said.
Noting that JLR’s reliance on diesel models exposes it to unfavourable regulations in Europe, Fitch said the legendary carmaker’s plans to offer electric variants for all of its models by 2020 but unexpected delays can dampen sales performance.
“We expect India’s auto sales volumes to stabilise gradually, but prolonged weakness in sales will exert further pressure on Tata Motors’ leverage,” the report said.
“Tata Motors’ volume fell over 20 percent in the June quarter. We expect a low double-digit decline for FY20 because of the still weak liquidity at lenders and slowing GDP growth,” it said.
JLR, which accounts for over 80 percent of revenue for Tata Motors, benefits from greater resilience to economic cycles than mass-market peers, but its smaller scale constrains its ability to derive the same level of economies of scale from its investments, as its larger peers, said the report.
On Wednesday, Tata Motors shares fell 3.17 percent to Rs 151.25 apiece on the BSE while the benchmark Sensex shed 0.36 percent to end the day at 37,847.65 points.