Moody's downgrades Tata Motors to Ba3 with outlook negative

Moody's Investors Service has downgraded Tata Motors Ltd's (TML) corporate family rating and the company's senior unsecured instruments rating to Ba3 from Ba2.

The outlook remains negative, it said in a statement.

"The downgrade reflects the sustained deterioration in TML's credit profile, with weaker than anticipated credit metrics -- led by the weak performance of its 100 per cent owned subsidiary Jaguar Land Rover (JLR) -- and our expectation that it will take longer than we had previously expected for the company's free cash flows to return to positive territory," said Kaustubh Chaubal, Moody's Vice President and Senior Credit Officer.

TML's credit metrics for the fiscal year ending March 2019 were significantly weaker than Moody's previous expectations, with consolidated debt/EBITDA leverage of 5.3 times and adjusted EBITA margins of just about 0.9 per cent, both breaching the downgrade triggers for the earlier Ba2 ratings.

While the company's restructuring efforts should prevent a further deterioration in its credit metrics, Moody's expects leverage will remain around 5 times, EBITA margins weak and under three per cent, and cash flows will remain negative for at least the next 18 to 24 months.

"The negative outlook on TML's ratings principally reflects the execution risks related to the timely turnaround of JLR's operations amid a subdued operating environment, driven by rising competition, the potential for a 'no-deal' Brexit and the possibility of US tariffs," said Chaubal, who is also Moody's Lead Analyst for TML.

"In addition, India's auto sector also faces challenges from slowing sales due to overcapacity, tightening liquidity, and a shrinking dealer network," he said.

JLR's credit profile has been under pressure for some time now. Challenging Chinese markets, persistent weakness in diesel car sales in Europe and Britain, and the business shift towards electrification, hybrid and full electric vehicle options to support the overall model line-up will require continued significant investments, pressuring JLR's free cash flow generation.

Looking ahead, Moody's expects auto demand in India will revive somewhat from the re-election of the government, likely normal monsoon season, stable fuel prices and the pre-buying ahead of the country's migration to the equivalent of Euro VI emission norms.

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