Covid-19 impact: S&P downgrades Tata Motors outlook to negative from stable

The rating agency cites weaker than expected operating performance as the reason for downgrade

Rating agency  S&P Global Ratings has downgraded the outlook for Tata Motors to negative from stable on account of a slower than expected recovery in company’s operational performance, it said in a statement on Thursday.  

The negative outlook, it said, reflects the risk that the continued impact of the Covid-19 pandemic on the global automotive market could disrupt the recovery we expect in Tata Motors' volumes and earnings over the next 12-24 months.

This is the second report by a global credit rating agency on the Tata Group flagship that raises concern about the company’s performance. On October 16, Moody’s Investor Services said an uncertain pace of recovery in the global auto market will continue to take a toll on Tata Motors and its wholly-owned subsidiary Jaguar Land Rover (JLR) Automotive for the next 12-18 months. But it added it is likely to retain its ratings on Tata Motors

Tata Motor’s losses in the September quarter widened year-on-year to Rs 307.3 crore compared with a net loss of Rs 187.70 crore a year ago. This was much lower than the loss of Rs 1,970.3 crore forecast by a Bloomberg poll of five brokerages.  The total revenue from operations during the period crimped. It was 18.19 per cent to Rs 53,530 crore, from Rs 65,431.95 crore a year ago.

The company is optimistic of the road ahead pointing out that the cash flow was extremely encouraging and business outlook remains encouraging.. As the situation normalizes and festive season starts, the company expects gradual pickup in demand in the domestic market.

But S&P is less sanguine. “Tata Motors’ earnings are recovering slower than we expected, resulting in higher leverage than we anticipated. We have lowered our forecast for the automobile company's sales volume and EBITDA for fiscals 2021 and 2022 owing to the slower recovery. The Covid-19 pandemic and a potential no-deal Brexit could weigh on our revised base case” S&P said in a release.

Tata Motors commercial vehicle (CV) sales in India in the first half of fiscal 2021 were about 60 per cent lower than a year earlier due to Covid-19-related lockdowns as well as continuing weak industry demand. Consequently, S&P expects fiscal 2021 and 2022 sales volumes to be 25 per cent to 30 per cent lower than its previous forecasts, it said.

This is on the back of a weak fiscal 2020, when CV sales dropped about 35 per cent. The agency had expected the second half of fiscal 2021 to be significantly stronger than the first half. Further, within the CV segment, a lesser proportion of the more profitable medium and heavy commercial vehicles is also a concern. It is likely to be 20 per cent to 30 per cent in fiscals 2021 and 2022, compared with around 40 per cent in fiscal 2019. This will drag down the overall profitability of the Indian operations, it said.

The rating agency however pointed out that company’s passenger vehicle business outperformed their expectations in the first half of fiscal 2021 with volumes increasing 10 per cent year-on-year and business breaking even at the EBITDA level. “We expect the PV segment to continue to perform well at least in the next six to 12 months. However, this will be inadequate to mitigate weakness in the CV segment,” it said.

Meanwhile, a no-deal Brexit or further widespread Covid-19 lockdowns could hurt U.K.-based subsidiary Jaguar Land Rover Automotive PLC (JLR), weighing on Tata Motors' credit quality. JLR (B/Negative/--) continues to recover post the first Covid-19 lockdown. However, pressure on the already soft global auto industry continues to escalate and a second wave of the pandemic is gathering pace in its key markets of Europe and the U.S. We anticipate a 20% decrease in global light vehicle sales in 2020, to about 70 million units, versus 90.3 million units in 2019.

The agency said Tata Motors' lower earnings will delay the deleveraging exercise underway. S&P expects company's reported EBITDA margin for the automobile segment to be 6 per cent to 8 per cent over fiscals 2021 and 2022, compared with its forecast of 8 per cent to 10 per cent.

“The margin was 5.4 per cent in fiscal 2020. In absolute terms, we have lowered our EBITDA estimate by about 20 per cent for fiscal 2021, and around 25 per cent for fiscal 2022, compared with our previous expectations,” said the agency.

Consequently, it forecasts the adjusted debt-to-EBITDA ratio for Tata Motors to rise to about 9x as of March 31, 2021, before declining to 7x by March 2022 (compared to its earlier expectations of about 7x and 5x, respectively).

“We could revise the outlook to stable if Tata Motors' earnings improve as we expect and its leverage shows signs of decline toward 5.0x by fiscal 2023,” it said.