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Fitch Ratings on Thursday said it has revised the outlook on Tata Motors to 'negative' from 'stable' on expectations that higher capital spending at Jaguar Land Rover will result in negative free cash flow in the current and the next financial year.
Disorderly Brexit
In a statement, Fitch said it believes that a disorderly Brexit could significantly disrupt JLR’s supply chain and affect the company’s earnings and cash generation.
It affirmed the long-term issuer default rating of Tata Motors’ at ‘BB+’
“The revision of the outlook reflects Fitch’s expectations of rising negative free cash flow (FCF) over the fiscal years ending March 2019 (FY19) and FY20, following upward capex revisions at Tata Motor’s fully owned subsidiary, Jaguar Land Rover Automotive plc,” Fitch said in the statement on Thursday.
Free cash flows are likely to improve post FY20, but “the ratings may be downgraded if we believe Tata Motor’s FCF is not likely to improve in line with our expectations,” it said.
The outlook revision, it said, also takes into account evolving risks, including a disorderly Brexit, higher global tariffs and slower execution of JLR’s plan to move away from diesel-based powertrains in Europe.
The affirmation of Tata Motors’ rating reflects the robust positioning of JLR - which accounts for more than 65 per cent of the company’s EBITDA - in the premium segment and a financial profile that will remain solid even after considering substantial investment in capacity expansion and new technologies over the next few years.
“The rating, which includes a one-notch uplift from Tata Motors’ ‘BB’ standalone rating on its linkage with its parent, Tata Sons Ltd, also reflects its leading position in India’s commercial-vehicle market and the recovering passenger vehicle business, after successful new-product launches in the previous few years,” it said.
Fitch expects a gradual improvement in the company’s profitability that has weakened in the previous few years due to weaker profitability at JLR. This should help free cash flow turn positive in FY21 and curb deterioration in consolidated leverage.
Other risks
Besides disorderly Brexit, risks may also come from the fluid global tariff situation and if JLR is slow to adopt non-diesel drivetrains in Europe. JLR’s EBITDA margin fell to 9.7 per cent in FY18 (FY17: 11.6 per cent) due to higher costs, leaving Tata Motors’ margin at around 11 per cent (FY18: 11.2 per cent, FY17: 10.6 per cent), despite an improvement in its Indian business.
“We expect a gradual lift in Tata Motors’ profitability over the medium-term following launches and model refreshes at JLR along with enhanced productivity and a shift in production mix towards low-cost locations, such as the new plant in Slovakia.
“We also expect Tata Motors’ Indian business to benefit from volume growth and its strategy to reduce the number of passenger-vehicle platforms, which will support margins despite intense competition,” Fitch said.
Investments to keep free cash flow negative
The rating agency said it expects JLR’s continuing large investments to keep Tata Motors’ free cash flow negative over FY19 and FY20, compared with earlier expectations of them turning positive by FY20.
“The investments are driven by JLR’s increased focus on electrification, autonomous driving and shared mobility,” it said.
“The company investments in emerging mobility technologies have gained traction, as evidenced by positive reviews of its first all-electric sport-utility vehicle (SUV), I-PACE, which was launched recently,” it added.
JLR is also developing a new modular platform to help it move away from diesel drivetrains, notably in Europe.
“Nonetheless, we expect the investments to improve the group’s ability to respond to emerging sector trends and strengthen its business profile in the long run,” Fitch said.
Tata Motors has further strengthened its leading position in India’s commercial-vehicle segment, with robust growth over the five months to August 2018. Sales volume rose by 62 per cent in medium and heavy commercial vehicles and 39 per cent in light commercial vehicles.
Sales volume in the expanding SUV market also surged by more than 200 per cent. Although this growth came off a low base, it reflects progress in the company’s strategy to regain lost passenger-vehicles segment market share, it said.
Tata Motors has an available cash balance of more than Rs 40,000 crore at FYE18 that was adequate to meet Rs 18,000 crore of debt maturing in FY19.
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