Tata Motors has seen its credit rating upgraded by Moody’s Investors Service to Ba3 from B2. The ratings agency also changed the outlook on the rating to stable from positive.
“The rating upgrade reflects the recovery in the operating performance of the Jaguar Land Rover (JLR) business exceeding our expectations and the company’s fast growing Indian business remaining solidly profitable, which have resulted in a much improved leverage ratio for TML,” said Alan Greene, a Moody’s VP/senior credit officer.
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Moody’s said that JLR’s performance bottomed out around the third quarter of 2009 and has been recovering steadily since then, driven by growing volume, a better geographical mix, the initial benefits of cost management measures, and higher revenues and margins on new product launches.
“With several issues affecting the company’s UK production facilities and workforce now settled, JLR has probably re-established a sustainable and competitive business model,” adds Greene, also Moody’s lead analyst for TML.
Moody’s also pointed to a solid recovery in Tata’s Indian business, driven by the strong fundamentals of India’s auto sector.
“While the commercial vehicle business continues to boom, and represents the mainstay of its India operation, TML’s passenger vehicle volume growth driven by recent product launches such as the ultra-low cost Nano and Indigo Manza is supporting strong revenue growth, allowing for continued double-digit EBITDA margins in India,” it said.
Moody’s said it expected Tata to continue to look for asset disposal opportunities in order to cut its gross debt of about US$8bn as of June 2010.
It also noted that the company continues to face medium-term challenges.
“Automotive demand could suffer in the US and Europe, as employment and credit growth remains elusive. Moreover, JLR’s performance highlights the substantial degree of operating leverage that is driving the volatility of its results.
“In addition, rising commodity prices will adversely affect the company’s margins if it cannot pass on increased costs through higher prices. And finally, competition in the fast-growing Indian market will heat up as other OEMs try to expand their presence; with GM and Ford on much sounder footings, global competition as a whole will intensify, pressuring smaller players such as TML,” a note from Moody’s said.
“The stable outlook reflects the business’s more solid footing, following the market acceptance of new products and with the strategy of the company’s business divisions being steadily implemented,” added Greene.
