S&P: Tata Motors Rating Raised To 'BB+' On Stronger Competitive Position Due To Success Of New JLR Models; Outlook Stable
"We raised the rating to reflect the improvement in Tata Motors' competitive position following the better performance of its 100% subsidiary, Jaguar Land Rover Automotive PLC (JLR)," said S&P Global Ratings credit analyst Mehul Sukkawala.
JLR has launched new models successfully, extended existing ones, and expanded into new market segments. JLR also helped strengthen Tata Motors' financial position and its ability to withstand moderate volatility and the risks from the U. K.'s recent vote to leave the E. U. (Brexit).
JLR has improved its product portfolio over the past two years and we expect the company to maintain its strengthened position. New and updated models are in the pipeline, including a Range Rover Evoque convertible (launched in 2016) and a long-wheel base version of the Jaguar XF in China. JLR's new models launched over the past 15-18 months were well received in the market. In addition, volume growth has been broad-based across different regions, especially in 2016.
JLR's good operating performance has a significant bearing on Tata Motors' overall operating performance. JLR accounts for more than 90% of Tata Motors' EBITDA.
"JLR's improved competitive position will enable Tata Motors to register good operating performance over the next two years in the form of revenue growth and higher EBITDA margin," said Mr. Sukkawala. "At the same time, Tata Motors' India operations have recovered with the improving economic environment, cyclical turnaround for commercial vehicles, and new product launches in the passenger vehicle segment."
We believe Brexit does expose Tata Motors' operating performance to some uncertainty because JLR has most of its manufacturing operations in the U. K. and a sizable presence in the domestic market. However, we believe Tata Motors' current financial profile and rating can accommodate the uncertainty.
Overall, we expect Tata Motors to maintain its current financial position. The stronger operating performance will be offset by its negative free operating cash flow due to high capital expenditure in areas such as vehicle programs and new capacity, especially at JLR. We believe the company's FFO-to-debt ratio will remain at about 40% and debt-to-EBITDA ratio will be about 1.7x for the next two years, providing adequate buffer to withstand any potential volatility from cyclicality and high operating leverage of the sector. In our debt calculation for Tata Motors, we exclude debt related to captive finance operations and deduct 75% of cash and cash equivalents.
JLR's established and improving market position in the global premium automotive segment with well-recognized brands and Tata Motors' low-cost manufacturing capabilities in its Indian commercial vehicle business support Tata Motors' business risk profile. However, we view JLR's still-modest size, its limited product range compared with larger global peers', and Tata Motors' market position in Indian passenger car segments as offsetting factors.
The stable outlook reflects our view that Tata Motors can maintain steady profitability, especially at JLR, supporting its financial position with a ratio of FFO to debt of about 40% over the next 12-24 months.
We may lower the rating if Tata Motors' operating performance weakens and capital expenditure is high, resulting in a ratio of FFO to debt remaining below 30% on a sustained basis. A weaker operating performance could indicate lower-than-expected success in new models or a challenging operating environment, such as larger-than-expected adverse impact from Brexit.
We may raise our rating on Tata Motors if JLR's strong operating performance partly offsets the increase in capital expenditure, such that we expect Tata Motors to sustain its ratio of FFO to debt above 45%. A further strengthening of JLR's product portfolio could support its strong operating performance.