The Hindu Business Line : Crisil marks down Tata Motors’ cash credit facilities

Mumbai, March 29 Crisil has revised its ratings on Tata Motors’ cash credit facilities to ‘AA-/Stable’, removing them from ‘Rating Watch with Negative Implications’, leaving unchanged the ratings on the company’s short-term debt programme and short-term bank facility at ‘P1+’.

The rating action follows Tata Motors’ announcement that it has entered into a definitive agreement with Ford Motor Company (rated ‘B/Stable/B-3’ by Standard & Poor’s) for the purchase of Jaguar and Land Rover, said a statement from Crisil.

The Indian company agreed to pay approximately $2.3 billion; including $600 million to be contributed by Ford Motor Company to the Jaguar and Land Rover pension funds.

Crisil had placed its long-term ratings on Tata Motors on watch following Ford Motor Company’s announcement, in January 2008, of its commitment to focused negotiations with Tata Motors on the potential sale of these business units.

Profile watch

Crisil expects Tata Motors’ business profile to change significantly following the acquisition: more than half of its total consolidated revenues are expected to be generated by the Jaguar and Land Rover operations.

These operations have been loss-making in the past, because of high operating costs, limited volumes, and competitive pressure in target markets.

Moreover, since the manufacturing operations are based in the UK and a large part of the sales are in the US, unfavourable pound-dollar exchange rates have also contributed to past losses.

Though the overall Jaguar-Land Rover operations are estimated to have turned marginally profitable, Crisil expects that it will take some time for the returns to become meaningful. The weak market position of Jaguar and Land Rover with less than 5 per cent share in the luxury car segment, Tata Motors’ limited experience in this segment, and the operation’s dependence on Ford Motor Company for critical component supplies and research and development (R&D), would pose further challenges to Tata Motors’ overall business profile, said Crisil.

Tata Motors’ financial profile is expected to deteriorate because of the large acquisition cost of around Rs 9,200 crore, coupled with planned capital expenditure in excess of Rs 10,000 crore, said Crisil.

This large expenditure will require a significant level of debt funding, weakening the company’s gearing to more than 1.25 times from the estimated current level of 0.6 times.

Replacing loan

Over the coming year, CRISIL expects Tata Motors to replace the $3-billion bridge loan taken to fund the acquisition and the working capital requirements of Jaguar and Land Rover, with a combination of debt, liquidation of existing investments, and fresh equity of $1 billion.

Nevertheless, the acquisition will provide Tata Motors a global footprint, and, over the medium to long term, CRISIL expects that Tata Motors will improve the profitability of the operations of Jaguar and Land Rover and will reduce their dependence on Ford Motor Company by developing in-house capabilities for component sourcing and R&D.

Ratings

The ratings continue to reflect Tata Motors’ strong market position across the domestic commercial vehicle, passenger car, and utility vehicle segments. And supported by this position, Tata Motors is expected to maintain its credit profile over the medium term.

The rating will continue to be constrained by the weak market position and low profitability of the Jaguar and Land Rover operations. The outlook could be revised to ‘Positive’ if these operations demonstrate improved profitability. Conversely, the outlook could be revised to ‘Negative’ if the improvement in profitability takes more time than expected, said CRISIL.

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