JLR’s 2020 volume set to decline

Improvement expected in Tata Motors’ credit profile will be impacted by COVID-19, expected to hurt global automotive market, said S&P Global Ratings in its assessment on 2 Apr 2020.

“Our previous ‘B+’ rating was predicated on our expectation that revenues and profit margins at both JLR and Tata Motors’ Indian operations would improve steadily in fiscals 2020-2022 (year ending March 31),” said S&P.

Even before the COVID-19 outbreak, JLR’s sales volumes for fiscal 2020 were likely to decline, while the Indian operations were affected significantly by structural changes in the commercial vehicle segment and a slowing economy.

The rating agency has altered our assumptions given uncertainty in production volumes and demand following the pandemic.

It now forecast Tata Motors’ consolidated revenues to decline about 5% in fiscal 2021 following a sharp revenue drop in fiscal 2020.

S&P expects reported EBITDA margins of 7%-9% over this period (previous estimate: 9%-11%). Cash flow metrics, such the ratio of funds from operations (FFO) to debt, are now expected to be around 5% versus our previous expectations of 10%-12%.

“We view positively the management’s focus on conserving cash amid the changes in operating conditions. We expect consolidated capital expenditure (capex) in fiscal 2021 to be at least 20% below fiscal 2020 levels,” said S&P.

Management has also identified significant further cost-cutting areas at JLR under “Project Charge +”.

Even so, S&P anticipates free operating cash flow (FOCF) will be negative for the next couple of years at least.

Tata Motors’ recent announcement to subsidiarize its domestic passenger car business and to explore mutually beneficial partnerships could be positive.

However, the plans are at an early stage and are not expected to have a significant impact in fiscal 2021, the rating agency pointed out.

“In our opinion, Tata Motors has adequate liquidity, both at JLR and at the Indian operations, to face this challenging period,” said S&P.

The Indian operations’ fundraising of Rs.65 billion (about US$900 million) in October 2019 has bolstered liquidity. The company raised Rs.30.2 billion through a preferential issue of shares to Tata Sons Pte. Ltd, the holding company of the Tata Group.

It also issued 231 million warrants to Tata Sons that would convert to one equity share. The exercise of these warrants would bring in another Rs.34.7 billion.

Tata Motors has already received 25% of the warrant money with the rest to be paid when the warrants are exercised (expected in the next 12 months).

The stable outlook mainly reflects our view that Tata Motors will maintain adequate liquidity over the next two years. This would partly mitigate the company’s weakening leverage and cash flow-based metrics, said S&P. fiinews.com


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