Fitch issues Tata Motors warning over JLR Brexit risks

Ratings agency Fitch has placed Tata Motors Limited's (TML) Long-Term Issuer Default Rating (IDR) of 'BB' on Rating Watch Negative (RWN) to reflect the "increasing risks of a disorderly Brexit for its fully owned subsidiary Jaguar Land Rover".

Fitch said that JLR, which accounts for the majority of Tata Motors' EBITDA generation, has a significant production bias to the UK.

It went on to say that trade barriers and logistic issues 'arising upon a disorderly Brexit could have an impact on JLR's competitive positioning, and lead to significantly lower sales and profitability and higher working-capital needs'.

The rating action follows a similar action on JLR's rating on 4 February.

The agency said in a note, "We aim to resolve the RWN in the next few months, when we will have more clarity over the outcome of Brexit negotiations and its impact on TML. This could lead to a downgrade by at least one notch."

Fitch maintains that a no-deal Brexit scenario has become more likely in recent weeks and points out that JLR sells about 20% of its vehicles in both continental Europe and the US, but manufactures them quasi-exclusively in the UK. This, it says, exposes it to increased tariffs and supply-chain disruptions from a disorderly Brexit, which could undermine its competitive positioning and affect cash generation.

Fitch adds that JLR's efforts to diversify its production base will ease the imbalance in the medium term but "vulnerabilities remain high in the short term". It also says the JLR business also faces risks from a fluid global tariff situation, its weakening competitive positioning in China, and the impact of tightening emission regulations on its product portfolio which is focused heavily on diesel.

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