Rating Rationale

Strengths:
* Strong legacy in the global luxury automotive segment
Jaguar and Land Rover are iconic brands with a rich heritage in the premium luxury segment. JLR's product development capabilities have enabled successful product launches and expansion into new segments, thus enhancing its product portfolio. CRISIL believes that with frequent refreshes, new product launches in Jaguar and Land Rover, and further integration of technology in its vehicles, JLR will continue to improve its product portfolio. In the near term, product actions for some of the key models such as F-Pace, Range Rover and Range Rover Sport are expected to go ahead without much delay, while models having a low volume-share are likely to see longer postponements.

* Strong market position in the domestic commercial vehicle (CV) business
TML's domestic business-particularly CVs segment--has demonstrated significant improvement in profitability and cash flows, despite market challenges. The company is consolidating its position as the largest player in the industry, with a market share consistently above 50% in goods medium & heavy CVs (MHCVs) and above 40% in goods light commercial vehicles (LCVs). TML's passenger vehicles (PV) business, however, has remained relatively weak, despite some improvements in recent years. In fiscal 2020, its market share declined to about 5%, from 6.7% in fiscal 2019 ' owing to closure of some of the company-owned dealerships. The recent announcement to hive-off the PV business to a subsidiary, can be a positive step for this business in the medium term.

The company faces a challenging environment given the sharp slowdown in India's automotive industry, which has worsened with the outbreak of Covid-19. Demand is expected to remain subdued for both CVs and PVs in fiscal 2021, followed by recovery in the subsequent fiscal. This will help the company revert to healthy operating profitability, given the turnaround exhibited by it in the last 2-3 years. The company is focusing on cost reduction, better dealer management, improving product portfolio and working capital efficiency. These measures should continue to drive improvement over the medium term.

* Healthy financial flexibility, including the benefit of being part of the Tata group
Liquidity remains strong, reflected in adequate cash surplus, significant unutilised fund-based facilities, coupled with back-ended debt repayment - at both JLR and the domestic business. Working capital cycle has also remained negative over the years, primarily because of high trade payables.

TML's financial flexibility also benefits from being one of the flagship companies of the Tata group. This is amply reflected in several instances of support from the group over the last decade, including the recent preferential allotment announced in October 2019.

Weaknesses:
* Weak operating performance at JLR owing to challenging market conditions and elevated business risks
Business risks are expected to remain elevated, especially in the context of the Covid-19 outbreak, which has affected both demand and the supply chain. A major disruption beyond Q1 fiscal 2021 is a key rating sensitivity. Moreover, JLR continues to face challenging market conditions, especially in Europe and China. Its sales volumes in China, however, have stabilised, though profitability for the region remained subdued, as reflected in the recent performance of its JV, CJLR.

JLR's business profile continues to be constrained by ongoing uncertainties around diesel vehicles in Europe, increase in product-related warranty costs and pressure on pricing. Moreover, its business remains exposed to the threat of imposition of stringent tariffs on auto imports in the US. This may impact volumes and profitability in this key market, especially since it has no manufacturing capacity in the region. Nevertheless, risks related to the terms on which Brexit is finalised have eased, following Britain's orderly exit in January 2020, followed by an 11 month transition period up to December 2020, by when a trade deal is expected to be finalised. CRISIL will continue to monitor the developments on these fronts.

* Sustained pressure on JLR's free cash flows over the medium term
The luxury car segment entails large capex, with successive product launches and investment in technology. The global auto industry is rapidly evolving with higher regulatory focus on emission norms and electric vehicles. Moreover, consumer preference is shifting towards new technologies such as connected cars and autonomous driving. Though in the near-term, JLR will reduce its capex sizably as it manages the Covid-19 related disruption, it has limited flexibility to defer its sizable capex over fiscal 2022 and beyond, without impacting its planned launches or investments in technology which are critical to sustain its market position. JLR's large capex is likely to result in sustained pressure on its free cash flows.