JLR Woes: Moody’s changes Tata Motors’ outlook to negative from stable

Moody’s Investors Service has changed the outlook on Tata Motors Limited’s corporate family rating to ‘negative’ from ‘stable’, a day after it cut its rating on company’s UK unit by one notch.

A negative outlook indicates that there is likelihood of a cut in the credit rating.

The ratings firm, however, did not cut the rating on Tata Motors from Ba2. Yesterday, Moody’s had cut JLR’s ratings to Ba3 from Ba2, and changed the outlook on the rating to negative from stable. Credit ratings tend to impact a company’s cost of borrowing, with higher-rated companies getting loans are lower interest rates.

Moody’s said the negative outlook reflects JLR’s weakening credit profile and “the significant challenges in accomplishing a rapid turnaround amid heightened market risks and headwinds from rising input costs and fuel prices, as well as adverse impacts from the outcome of the Brexit negotiations.”

“The negative outlook reflects our expectation that the weak operating performance of TML’s wholly owned subsidiary, Jaguar Land Rover Automotive Plc (JLR), will likely continue over at least the next 12-18 months, in turn weighing on TML’s earnings and consequently also the rating trajectory.” said Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer.

The negative outlook also reflects the execution risks associated with JLR’s ability to achieve its announced cost and efficiency improvements, against its need to maintain high levels of investments towards reducing emissions and for its electrification strategy, it added.

JLR, which makes high-end and luxury cars and SUVs, has seen the going get tough in recent months in the wake of rising international import tariffs, tougher environmental regulations and a ‘hard exit’ for Britain from the Eurpean Union that may make it more difficult for the company to export vehicles to the continent.

“Over the first half of the fiscal year ending March 2019 (1H FY2019), JLR’s operating performance further weakened and has remained well below Moody’s expectations,” the rating agency said, blaming “difficult market conditions in China and the continued weakness in diesel car sales in Europe and the UK.”

During April-September, JLR reported a decline of 4.1% in retail volumes, while wholesale volumes were down 10.1%, compared to the same period the previous year.

This fall resulted in a decline of 8.9% in revenue and a fall in EBITDA to 836 million pounds from 1.188 bln in the previous year.

The UK company plunged to a loss of 232 million pounds — before interest and taxes — while it had a profit of 398 million last year.

Free cash flow was negative 2.2 billion in the six months, compared negative 1.1 billion in the corresponding period. Free cash flow refers to the money left after all expenses, including both operating costs as well as capital costs, are accounted for. JLR reports around 4 billion pounds a year in capital and product development costs.

“While JLR has announced cost savings and an efficiency plan yielding GBP2.5 billion in cost savings over the next 18 months, Moody’s cautions against the prospects of a rapid turnaround within second half FY2019,” the agency said.

Heightened market risks — including uncertainties regarding Brexit risks and associated costs, weakening car demand in China, rising input costs from higher raw material prices, and rising fuel prices — could dent the extent of costs savings or the timelines for the proposed turnaround, Moody’s added.


Meanwhile, TML’s ex-JLR operations, in particular, its commercial vehicles (CVs) and passenger vehicles (PVs) businesses in India, continue to improve, mirroring favorable industry dynamics, the company’s recent product launches, and the focus on cost rationalization measures, the ratings agency pointed out.

It also noted that non-JLR operations now account for one half of the company’s consolidated EBITDA.

Looking ahead, Moody’s expects the strongly performing ex-JLR businesses to continue providing cushion to consolidated metrics, with adjusted debt/EBITDA comfortably maintained at levels of 3.4x-3.8x over the next 12-18 months, it said.

Moody’s expects rising commodity prices and a challenging operating environment for JLR to keep Tata Motors’ EBITA margins below 3%.

“And while somewhat reduced, JLR’s capital and product development expenditure of around GBP4 billion annually is still high and will keep free cash flows negative,” it said.

Moody’s expects India’s commercial vehicle sales volumes to grow by mid-teen percentages over the next 12-18 months.

Tata Motors is the market leader in this segment — with a 46% share — and will likely continue to introduce new products, sustaining its track record of above-industry-average growth rates, and thus modestly strengthening its overall market share, the ratings agency said.

Tata Motors has also seen some success in its passenger vehicle business in India, particularly in its car business.

Its share of the Indian PV market increased to an estimated 6.2% in the last six months from 4.6% in three years ago.

The business achieved breakeven after years of being a drag, it pointed out.

“The PV business’ ability to sustain this improvement will therefore remain a key rating sensitivity, especially amid slowing, although still high single-digit, growth rates and tightening financing conditions in India,” it said.

TML’s ratings continue to incorporate a one-notch uplift from its parent Tata Sons Ltd., reflecting Moody’s expectation of extraordinary support from Tata Sons, should the need arise, it said.