Moody's Investors Service has downgraded to Ba2 from Ba1 the corporate family rating (CFR) for Jaguar Land Rover parent company Tata Motors (TML). It also downgraded the company's senior unsecured instrument ratings to Ba2 from Ba1 but said "the rating outlook is stable".

"The downgrade to Ba2 reflects our expectation of continued weakness in TML's consolidated credit metrics over the next two years, led by its wholly owned subsidiary Jaguar Land Rover Automotive (JLR, Ba2 stable)," said Kaustubh Chaubal, a Moody's VP and senior credit officer.

Although JLR accounted for 48% of TML's group unit sales in the fiscal year ending 31 March 2018, it generated 78% and 76% respectively of TML's reported consolidated revenues and EBITDA for the automotive business. Given this large contribution, weakening credit metrics at JLR have a direct and immediate impact on TML's consolidated results, Moody's said.

"Notwithstanding the improvements in TML's Indian automotive business, it continues to operate at a higher leverage, with an estimated reported debt/EBITDA of 4.8x as of 31 March 2018. As such, the improvements are not sufficient to compensate for JLR's weakening metrics.

"TML's consolidated adjusted debt/EBITDA rose to an estimated 3.8x as of March 2018 from 3.0x a year ago and is likely to remain elevated over the 12-18 months. At the same time, large capital and product development expenditure at JLR of GBP4.5bn annually will keep free cash flows negative. Moreover, Moody's also expects that rising commodity prices and a challenging operating environment for JLR will keep TML's EBITA margins below 3%.

"Meanwhile TML's ex-JLR operations, in particular the India business, will continue to improve, on the back of favourable industry dynamics, the company's upcoming product launches and focus on cost rationalisation measures."

Moody's expects India's commercial vehicle industry to grow by mid-teen percentages over the next 12-18 months. TML is the market leader in this segment - commanding a solid 45% of the market - and will likely continue to introduce new products, sustaining its recent track of above industry average growth rates, thus modestly strengthening its overall market share, it said.

TML's share of the passenger vehicle market also increased to an estimated 6.5% Q4 fiscal 2018 from 4.9% in Q1 fiscal 2018, but TML's low capacity utilisation levels and cash burn in passenger models are a drag and thus a rating concern.

Moody's expects the Indian passenger vehicle market to grow at high-single digit percentages over the next 12-18 months, and for TML to further grow its market share through new product launches and efforts to improve its customer service and engagement.


"The stable outlook reflects JLR's relative strength and Moody's expectation that although capital spending and product development requirements will remain high over the next two years, TML's sizeable consolidated cash balances, strong operating cash flow and long-dated debt maturity profile will allow the company time for its free cash flow to return to positive.

"The stable outlook also reflects TML's leadership position in CVs in India, in turn underpinning strong growth prospects for its ex-JLR operations.