Moody’s Investor Services has downgraded the outlook for Tata Motors Ltd's (TML) corporate family rating to negative from stable on the expectations that the weak operating performance of Jaguar Land Rover Automotive (JLR) will likely continue over at least the next 12-18 months, in turn weighing on Mumbai-based company's earnings and consequently also the rating trajectory.
JLR’s ratings was downgraded to Ba3 negative from Ba2 stable, reflecting the sustained deterioration in the operating and credit profiles of the UK-headquartered premium car manufacturer, the report said.
“Over the first half of the fiscal year ending March 2019 (1H FY2019), JLR's operating performance further weakened and has remained well below Moody's expectations. This has been mainly caused by more difficult market conditions in China and the continued weakness in diesel car sales in Europe and the UK. During 1H FY2019, JLR reported a decline in retail volumes of 4.1 percent - while wholesale volumes were down 10.1 percent - compared with 1H FY2018,” the report added.
The rating agency is cautious against the prospects of a rapid turnaround in the second half of FY2019, even after the car manufacturer had announced an efficiency plan yielding 2.5 billion British pound in cost savings over the next 18 months, the report added.
“Heightened market risks - including uncertainties regarding Brexit risks and associated costs, weakening car demand in China, rising input costs from higher raw material prices, and rising fuel prices - could dent the extent of costs savings or the timelines for the proposed turnaround,” the rating agency argued.
However, Tata Motors ex-JLR operations, which includes its commercial vehicles and passenger vehicles business in India, continue to improve, “mirroring favorable industry dynamics, the company's recent product launches, and the focus on cost rationalisation measures.” As a result Moody’s expect that the ex-JLR business will continue to provide support to Tata Motors’ consolidated metrics.
In the commercial vehicle section, Tata Motors has emerged as the market leader with 46 percent market share, as a result of which Moody’s expects India’s commercial vehicle sales to grow by mid-teen percentages over the next 12-18 months, and will likely continue to introduce new vehicles, maintaining its record of above-industry-average growth rates.
In the passenger vehicles (PV) segment, Tata Motors Indian market share achieved a breakeven after a long drag, the report said, adding that, “The PV business' ability to sustain this improvement will therefore remain a key rating sensitivity, especially amid slowing, although still high single-digit, growth rates and tightening financing conditions in India.”