TML's rating, which includes a one-notch uplift from its standalone rating of 'BB' on its linkage with Tata Sons Limited (TSOL), reflects its leading position in India's commercial-vehicle market and the passenger-vehicle business, which is recovering after the success of new product launches in recent years. TML's rating also reflects its 100%-owned subsidiary Jaguar Land Rover Automotive plc's (JLR, BB+/Stable) strong positioning in the premium segment and a financial profile that will remain solid even after considering substantial investments for capacity expansion and new technologies over the next few years. JLR's EBITDA accounted for more than 85% of TML's consolidated EBITDA in the fiscal year ended 31 March 2017 (FY17).
The Stable Outlook reflects Fitch's expectations of gradually improving profitability and strong financial flexibility, which will help to meet significant investment requirements, especially in the JLR business, without any liquidity concerns and support TML's leverage at a level commensurate with the current rating.
KEY RATING DRIVERS
Improving Indian Business: TML has strengthened its leading position in the Indian commercial-vehicle segment after product launches that addressed portfolio gaps and helped improve customer engagement. TML's sales volume grew by 9% yoy in medium and heavy commercial vehicles and 23% in light commercial vehicles in FY18. Its overall market share rose to 47.5% as of December 2017 from 44.4% as of March 2017, according to Society of Indian Automobile Manufacturers data. We expect demand for commercial vehicles to remain healthy in the next 12-18 months, supported by India's improving economy and the government's plans to ramp up infrastructure outlays.
TML's strategy to increase its presence in different sub-segments has helped it regain some of its lost market share in India's passenger-vehicle market despite intense competition. TML's passenger-vehicle market share rose to 6.2% as of December 2017 from 5.2% as of March 2017 as the company's volume gained 21% yoy in FY18. TML's sales volume in the growing SUV market surged more than 150% in FY18 on good market reception of its new models, such as Nexon and Hexa. Fitch expects continued growth in TML's passenger-vehicle business as the company is aiming to increase its product range to cover nearly 95% of the market by 2020 from about two-thirds currently.
Gradually Improving Profitability: Fitch expects TML's margins to improve gradually over the medium term as the company benefits from increasing scale as well as steps to achieve cost savings. TML's India business will benefit from healthy volume growth and its strategy to reduce the number of passenger-vehicle platforms, which will help to streamline costs and maintain profitability despite intense competition. JLR's profitability will be supported by model updates and new launches that will enable greater coverage across various market segments. JLR will also benefit from an increase in lower-cost production locations as its Slovakian plant ramps up after it is commissioned in 2018.
In Fitch's view, these factors will help to counter the impact of higher costs arising from rising metal prices and tightening emission requirements globally.
Robust JLR Business: JLR continues to benefit from its strong brand positioning in the premium segment and solid financial metrics. JLR is relatively small compared with other premium carmakers but its growth strategy has focused on improving portfolio breadth, especially in the high-growth SUV segment, and improving geographic diversification outside of the UK. JLR is also investing significantly to expand its offerings in non-conventional drivetrains. This will help mitigate risks associated with more challenging emission regulations. Robust growth in China and the new facility in Slovakia will help to counterbalance risks from Brexit.
High Capex; Stable Leverage: Fitch expects TML's sizeable investments in capacity expansion, vehicle architecture and new technologies to lead to negative free cash flow (FCF) over FY18 and FY19 despite robust cash flows from operations. This includes capex of GBP1.0 billion for JLR's new facility in Slovakia with an initial capacity of 150,000 units and about INR40 billion-45 billion of annual capex for its Indian business, mainly for new launches of passenger vehicles. The increase in TML's leverage (net adjusted debt/EBITDAR) to 1.5x in FY18 is consistent with the current rating and we expect it to decline to around 1.2x over the next two years as new investments lead to higher earnings.
Strategic Importance to TSOL: TML's rating benefits from a one-notch uplift due to its moderate linkages with its stronger shareholder, TSOL, as defined in Fitch's Parent and Subsidiary Rating Linkage criteria. Fitch believes TSOL is likely to continue to extend support to TML, if required, due to the latter's strategic importance to the group, and the reputational risk arising from the shared Tata brand. TSOL subscribed in full to its share of TML's INR74.3 billion rights issue in FY16 and has provided financial support to TML in the past. Any weakening of the linkages between the group and TML, or a deterioration in TSOL's ability to provide support, is likely to affect the ratings negatively.
DERIVATION SUMMARY
TML's standalone rating of 'BB' is well-positioned relative to peers in each major metric. TML's standalone rating is one notch lower than that of Peugeot S.A. (PSA, BB+/Positive). TML has more premium product offerings, through JLR, for which demand has generally been less cyclical than for the mass-market products of competitors, such as PSA. This is outweighed by PSA's considerably larger operating scale and its stronger financial profile. TML's premium product offerings counterbalance its small operating scale when compared with Fiat Chrysler Automobiles N.V. (FCA, BB/Positive). This, and a similar leverage profile, supports TML's standalone rating at the same level as FCA's.
KEY ASSUMPTIONS
Fitch's Key Assumptions Within Our Rating Case for the Issuer
- JLR volume growth of about 5%-6% over FY19-FY20 and EBITDA margin improving to around 12%-13% due to increasing scale and higher production in low-cost countries as Slovakian operations ramp up.
- India operations to see sustained volume growth; EBITDA margin to improve to around 8%.
- Capex/revenue of around 14% in FY18 and around 11% thereafter.
- Resumption of dividend payment, gradually increasing to INR7.0 billion by FY20.
RATING SENSITIVITIES
Developments That May, Individually or Collectively, Lead to Positive Rating Action
- We do not expect any positive rating action in the medium term as it takes time for the group to increase scale to a level that is similar with its global peers. Positive rating action may result if the TML group materially increases the volume and breadth of its products, while maintaining profitability and a strong financial profile.
Developments That May, Individually or Collectively, Lead to Negative Rating Action
- A weakening of linkages between the Tata group and TML.
- Consolidated net adjusted debt /EBITDAR (excluding TML's auto-financing subsidiary Tata Motors Finance Limited) exceeding 1.5x on a long-term basis due to weaker sales or profitability (either at TML or JLR ) or due to debt-funded investments that are higher than our expectations.
LIQUIDITY
Strong Liquidity: TML's readily available cash balance of more than INR400 billion at 31 March 2017 was adequate to meet INR135.4 billion of debt (both excluding the financial-services business) maturing in FY18. The liquidity profile is further supported by a balanced debt maturity profile and undrawn committed credit facilities - including GBP1.9 billion available to JLR and INR5 billion to TML at the end of December 2017. We expect TML's financial flexibility to remain robust as the available liquidity would have comfortably covered projected negative FCF of more than INR100 billion in FY18.
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