S&P downgrades Tata Motors to stable from positive

Tata Motors' ratio of funds from operations to debt will be weaker at 20 per cent

Standard & Poor's Ratings (S&P) today revised outlook on India-based automaker Tata Motors Ltd (TML) from "positive" to "stable".

The demand slowdown in China and continuing capital expenditure at Jaguar Land Rover Automotive Plc (JLR), will result in negative free operating cash flows and weaker financial ratios for TML in fiscal 2016 than we previously expected', S&P said in a statement.

"However, we expect new model launches and a recovery in demand to support Tata Motors' financials in fiscal 2017 and onward", it said.

At the same time, Standard & Poor's affirmed its 'BB' long-term corporate credit rating and 'BB' long-term issue ratings on the U.S.-dollar denominated senior unsecured notes issued by the company.

Tata Motors' ratio of funds from operations (FFO) to debt will be weaker at about 20 per cent, instead of our previous expectation of above 30 per cent. The slowdown in Chinese demand - the key driver for growth for JLR and other luxury carmakers in the past few years - will result in weaker operating performance and lower margins for Tata Motors than previously anticipated.

While global new model launches can support growth in fiscal 2017, the fiscal 2016 EBITDA (earnings before interest, taxes, depreciation, and amortisation) could be weaker.

"Based on JLR's successful launches in the Land Rover range, we are optimistic that continuing growth in other international markets and planned new launches for Jaguar can offset some of the weakness in China demand from fiscal 2017. However, JLR will continue to invest heavily with more than £3 billion annual investments for new product development and emission and safety controls", S&P said.

As a result, free operating cash flows will be significantly negative, leading to a ratio of FFO to debt of closer to 20%. This is despite the expected recovery in its Indian operations and an equity rights issue of $1.2 billion by Tata Motors in May 2015, because we expect JLR to continue to contribute more than 90 per cent of Tata Motors' EBITDA, it added.