JLR dents Tata Motors

S&P Global Ratings recently affirmed ‘B+’ rating on Tata Motors, removing it from CreditWatch believing that geopolitical risks such as Brexit and US tariffs could take longer than expected to play out.

“In our view, Tata Motors’ continued cash burn largely at its UK-based subsidiary Jaguar Land Rover Automotive PLC (JLR) is denting the company’s financial position,” said S&P.

“In addition, we are unsure of the timing and outcome of significant events such as Brexit and US trade tariffs. Therefore, we resolve our CreditWatch and affirm the rating with a negative outlook.”

S&P expects Tata Motors’ finances to improve over the next two years, largely driven by volume recovery from JLR’s new product launches, stabilizing Chinese markets, and GBP800 million of budgeted cost cuts under project charge.

An expectation of volume growth in its Indian market, which hinges on late recovery of monsoon and overall shift to new emission norms, should also aid the recovery, said S&P.

“We believe the improvements can increase EBITDA margin (S&P adjusted) by 200-250 basis points over the next two years, from the historic low of 1.7% in fiscal 2019,” said the rating agency.

It projects improved profitability will narrow the negative free operating cash flow (FOCF) although it will continue to remain negative until fiscal 2022.

Tata Motors is expected to generate negative FOCF of Rs.140 billion-Rs.150 billion annually over the next 12-24 months, largely due to JLR’s cash burn.

S&P has revised estimates of JLR’s negative FOCF to about GBP1.2 billion each in fiscal 2020 (year ending 31 March 2020) and fiscal 2021, compared to previous estimates of GBP1.3 billion and GBP0.7 billion, respectively.

‘We believe the company’s focus on running tighter inventory levels will help arrest some of the cash burn.”

Tata Motors’ first-quarter fiscal 2020 (ended 30 June 2019) financial performance remained weak, with JLR volumes down 11.6% across markets and India commercial vehicle (CV) volumes 14.8% lower.

Despite severe volume declines, the reported negative FOCF of RS.116 billion was better than RS.187 billion in the same quarter last year.
Working capital and cost savings from JLR’s project charge helped narrow the cash burn over the last year or so.

S&p believes Tata Motors will continue to work on multiple fronts, including evaluating tie-ups and partnerships, to manage its capital spending, particularly at JLR, which will remain high at GBP3.8 billion-GBP4.0 billion annually over the next two to three years.

The negative outlook reflects Tata Motors’ vulnerability to continued cash burn at JLR, further risks from uncertainties on Brexit and US tariffs, as well as India’s automotive market slowdown.

“We may lower the ratings by one notch if we see diminishing prospects of turnaround at JLR. This may happen if JLR’s new launches fail to resurrect the volumes or the company fails to achieve its expected costs savings, resulting in Tata Motors’ negative FOCF surpassing INR200 billion over the next 12 months.

“We may also downgrade Tata Motors if we expect Brexit or other geopolitical risks to cause further disruptions to its operations, increasing the pressure on business and financial position.

“In an unlikely situation, we may also downgrade Tata Motors if the significant cash burn results in weak liquidity or if we see rising refinancing risks due to waning bank support.

“We may revise the outlook to stable if Tata Motors improves its performance in line with our expectation such that the FOCF is expected to turn positive sustainably.

“Reducing risks from a disorderly Brexit or US tariffs, and overall improvement in JLR’s global operations and Tata Motors India operations over the next six to 12 months could indicate such a scenario,” said S&P. fiinews.com