Moody's assigns Ba3 rating to Tata Motors' proposed senior unsecured notes

Moody's Investors Service said on Tuesday it has assigned a Ba3 rating to the proposed senior unsecured notes to be issued by Tata Motors Ltd (TML).

The rating outlook is negative. The proposed notes rank pari passu (on equal footing) with TML's existing senior unsecured notes and are therefore rated at the same level as these notes and TML's Ba3 corporate family rating.

"The Ba3 ratings reflect TML's leading market position in commercial vehicles in India, 100 per cent ownership of the premium and luxury car manufacturer Jaguar Land Rover (JLR) Automotive Plc and ownership by Tata Sons, which results in a one-notch uplift, reflecting our expectation of continued parental support when needed," said Kaustubh Chaubal, a Moody's Vice President and Senior Credit Officer.

On October 25, TML announced that it will make a preferential allotment of equity shares and convertible warrants to Tata Sons for a 914 million dollar equity injection of which 548 million dollars will be paid immediately and the balance over a period of 18 months.

Pro-forma the preferential allotment and the conversion of the warrants, Tata Sons' shareholding in TML will increase to 46.4 per cent from the current 38.4 per cent.

"We view the preferential allotment as a credit positive because TML plans to apply the proceeds towards reducing its debt," added Chaubal.

"The equity injection also reflects Tata Sons' continued support, and will somewhat reduce the pressure on TML's balance sheet stemming from the weak operating performance of its India business even as JLR delivers some improvement."

However, TML's operations excluding JLR -- in particular commercial and passenger vehicles in India -- face acute challenges with sluggish economic growth, weak liquidity, tight financing norms and low rural income negatively affecting consumer sentiment.

TML's passenger vehicle sales volumes declined by 41 per cent in the first half of the fiscal year ending March 2020 while commercial vehicle volumes declined by 29.5 per cent over the same period.

On November 7, Moody's changed its outlook on India's sovereign ratings to negative from stable, reflecting increasing risks that the country's economic growth will remain materially lower than in the past.

While government measures to support the economy should help to reduce the depth and duration of India's growth slowdown, prolonged financial stress among rural households, weak job creation and more recently a credit crunch among non-bank financial institutions have increased the probability of a more entrenched slowdown.

Therefore, although TML will likely deliver slightly better volumes in H2 fiscal 2020 as festive demand picks up, Moody's remains sceptical about the long-term impact of short-term government stimulus measures for the auto industry.

TML is the largest manufacturer of commercial vehicles and passenger vehicles in India. The company's products include light, medium and heavy vehicles like trucks, pick-ups and buses, utility vehicles and passenger cars.

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