Fitch upgrades Tata Motors to BB+ with stable outlook

Following an improvement in its struggling domestic operations, Fitch Ratings today upgraded Tata Motors' ratings to BB+ from BB with a stable outlook.
"The upgrade of long-term issuer default ratings to BB+ from BB reflects the sustained improvement in its domestic business over the past two years, supported by growing commercial vehicle volumes, successful new product launches in the passenger vehicle segment, and the renewed focus on meeting medium-term capital needs for domestic operations via internal funds," Fitch said in a statement today.
In the just-concluded fiscal year, the company outgrew the CV market by more than double the rates at 22 per cent while the industry clipped at only 10 per cent. It expects better traction in fiscal 2018. With new launches like the small cars Tiago and Tigor, and the SUV Hexa, its for-long struggling car business is also on course for a turnaround with volumes outpacing the industry average.

"We expect Tata Motors to continue to grow domestic business and capture more market share over the medium-term," the report said, but added that its margin will remain muted at 3-4 per cent due to intense competition in passenger vehicles, and rising raw material and marketing costs.
The company has set a target of becoming the third largest car player, a position it held for long before the trouble began a few years back. The company is placed at No 5 in terms of volumes now.
"The rating also reflects its 100 per cent British subsidiary Jaguar Land Rover's strong credit profile. JLR's pre-tax profit accounted for close to 85 per cent of the parent's consolidated pre-tax profit in fiscal 2016," it said.

On the sustained recovery in the domestic operations, which it cited as the major driver of the upgrade, Fitch said the company's renewed focus on cars in the past two years has translated into successful launches. For example, the launch of the Tiago in April 2016 drove double-digit volume growth in its car segment in fiscal 2017.

"We expect demand for CV sales to improve in the next 12-18 months supported by improving economic activity. Its medium & heavy commercial vehicle business has historically been a strong performer, and boasts a domestic market share of more than 50", the report said.

After a long gap, Tata Motors also became the largest bus-maker overtaking Ashok Leyland in fiscal 2017 by a wide margin taking its market share to over 52 per cent.
On continuing good show by JLR, Fitch noted that its strong volume growth of 17 per cent yoy in the first nine months of the year, driven by by strong contribution from the new Jaguar F-Pace, offset the decline in the Land Rover Discovery and discontinuation of the Land Rover Defender.
"We expect the Land Rover products - mainly luxury SUVs - to continue to benefit from robust demand in both the developed and developing markets. Launch of the new Jaguar XE and F-Pace fill in important gaps in JLR's product portfolio. Its strategy of premium products resulted in higher margins than its rating peers," the report noted.

JLR continues to report volume growth of 7-8 per cent over 2017-20 period and pre-tax margins stabilise at around 14 per cent due to increasing economies of scale as volumes grow (adding a 15,000 units plant in Slovakia), and a focus on in-house R&D and key components procurement.