| Tata Motors Limited | ||||||||||
| Ratings Reaffirmed | ||||||||||
| Rating Action | ||||||||||
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| 1 crore = 10 million | ||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments of Tata Motors Limited (TML). CRISIL Ratings has withdrawn its rating on the Rs.1000 crore proposed bank facilities based on the company’s request. The withdrawal is in line with CRISIL Ratings’ policy on withdrawals.
The ratings continue to reflect strong legacy of Jaguar Land Rover (JLR) in the global luxury automotive (auto) market, robust market position of TML in the domestic commercial vehicle (CV) segment, improving position in the passenger vehicle (PV) segment, and strong financial support from the Tata group and specifically Tata Sons given its strategic importance, lending substantial financial flexibility. These strengths are partially offset by intense competition in the global luxury auto sector and inherent cyclicality in the domestic CV and PV businesses.
For the first half of fiscal 2022, JLR’s wholesale volume (excluding China JV) were 21% higher on-year on a low base, but below earlier expectations. Second quarter volume contracted steeply by 24% sequentially owing to higher-than-expected semiconductor shortages. With this likely to ease only gradually over the next few quarters, volumes may be 10% lower on-year in fiscal 2022 against earlier expectation of healthy volume growth. Demand remained strong on the domestic front, with overall volumes up by over 112% on-year driven by low base and continued strong performance in PV segment and cyclical recovery in the CV segment although steep commodity input price increases have limited margin expansion.
During fiscal 2022, the company hived off the PV unit into a separate subsidiary, Tata Motors Passenger Vehicle Ltd, post receipt of approval from National Company Law Tribunal. It proposes to transfer passenger electric mobility business into a separate subsidiary, Tata Passenger Electric Mobility Ltd (TPEML), and has already diluted 11-15% stake to a global strategic partner -- TPG Rise Climate -- for a consideration of $1billion at an enterprise valuation of $9.1 billion. The funds will be utilised towards product, platform, design and infrastructure creation.
Overall, consolidated EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin may decline by 250 basis points (bps) over fiscal 2021 to 7.25-7.50% owing to impact of negative operating leverage on lower JLR volumes and due to commodity inflation, partly offset by favourable product mix and continued cost control. Free cash flow (FCF) post meeting capital expenditure (capex) is expected to be marginally negative in fiscal 2022. Reduced operating profitability will weaken adjusted net debt to EBITDA to over 4.0 times this fiscal against earlier expectations of improvement to 2.4 times.
A sharp recovery of 30-35% rise in JLR volume is projected for fiscal 2023, on the expectation of improvement in semiconductor supply. Crucially, demand remains strong with retail order book at over 1.25 lakh units (against second-quarter run rate of 64,000) and inventories at record lows. Domestic CV and PV should continue to post healthy growth. Improved operating leverage, better product mix and easing commodity inflation may lead to consolidated EBITDA margin to expand by 250 bps to around 10% and consequently, moderate the adjusted net debt to EBITDA to below 2 times. Improvement in semiconductor supplies remains a key risk and monitorable.
The company maintained its commitment to become net auto debt free by fiscal 2024 mainly through improved volumes and higher margin driving FCF at JLR, divestments and equity infusion. The company plans to optimise platform architectures and lower capex intensity (~GBP 2.5 billion per annum on a sustainable basis). However, high competitive intensity and risks related to technology and regulations and the company’s progress against the same would remain closely monitored. |
Analytical Approach CRISIL Ratings has combined the business risk profiles of TML and its subsidiaries (included in Annexure - list of entities consolidated), including JLR and its joint venture, Chery Jaguar Land Rover Automotive Co Ltd, in proportion to its shareholding. To arrive at its ratings, CRISIL Ratings has applied its group notch-up framework to factor in the extent of support available from the Tata group.
In regard to Tata Motors Finance Ltd ((TMFL; ‘CRISIL AA-/CRISIL A/Stable/CRISIL A1+’), which is a captive finance subsidiary, CRISIL Ratings has used the capital allocation approach wherein the capital required for maintaining the credit risk profile is factored. To arrive at the adjusted net debt, CRISIL Ratings reduced the surplus cash of TML and debt of TMFL from the consolidated debt of TML and has also added acceptances to the debt. Surplus cash is defined as cash & equivalents exceeding Rs 15,000 crore, which may be required for daily operations of JLR and domestic business.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths Strong legacy in the global luxury auto segment Jaguar and Land Rover are iconic brands with a rich heritage in the premium luxury segment. JLR’s product-development capabilities enabled successful launches and expansion into new segments, thus enhancing its product portfolio. New product launches in Land Rover segment such as Defender and refreshed version of Range Rover have gained good traction driving the overall sales. While Jaguar has been a drag on profitability, the company is looking to modernise the brand, scale-down loss-making sedans and make it all-electric from 2025. With frequent refreshes and new product launches in the Land Rover segment, TML would continue to maintain its niche position in the global auto market.
Dominant market position in domestic CV segment and improving market position in domestic PV TML is the dominant player in the domestic CV segment, with a market share of over 60% in the medium & heavy CVs (MHCVs), ~50% in intermediate light CVs (ILCV), 38.4% in small CVs (SCV) and ~40% in buses. Although TML’s overall market share particularly in SCVs and buses declined over the years, it will stabilise with the management’s focus on improving product portfolio and further enhancing distribution reach. Its strong distribution presence along with service touchpoints provides it with a competitive edge. Its captive finance subsidiary arm -- TMFL -- also aids its strong market position. For the first half of fiscal 2022, CV volume grew by over 108% on-year, driven by low base and gradual recovery in the economic activities. For fiscal 2022, we expect a strong 35-40% volume expansion to over 3.5 lakh units and 15-20% growth over the medium term due to low base of the industry as compared to fiscal 2018/19 levels and partly due to pick in demand from end-user industries.
On the PV front, the company has seen significant turnaround in the operation in past 18 months, led by new product launches, product re-engineering and footprint expansion leading to increased reliability and acceptance amongst customers. As of September 2021, the market share grew to ~13.9% from a meagre 4.2% in fiscal 2020; this led to margin rising to 4.7% for the first half of fiscal 2022 from a negative -9.4% in fiscal 2020, despite high commodity prices. Medium-term outlook remains favourable with healthy growth in volumes and that will support margin to expand to 7-9%.
Strong financial support from the Tata group TML is one of the flagship companies of the Tata group. The group chairman, Mr N Chandrasekaran, also chairs its board. Given its strategic importance, it derives strong financial support from the Tata group through its holding company, Tata Sons Ltd. This is reflected in several instances of support over the years, including the Rs 6,500 crore infusion in fiscals 2019 and 2020, which also increased the promoter stake to 45.82% in January 2021 from 38.37% in March 2019. Being a part of the Tata group, the company derives significant financial flexibility and access to low-cost funds from banks and capital markets.
Weaknesses Intense competition in the global luxury car segment and capital-intensive nature of business JLR is exposed to stiff competition from bigger and established brands such as BMW, Daimler and Volkswagen. JLR with its niche presence in premium SUVs (sport utility vehicles), has relatively low market share in the world luxury car segment. Due to these factors, profitability is weak as compared to peers. Moreover, the auto business requires 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 transition to electric vehicles. Further, consumer preference is shifting towards new technologies such as connected cars and autonomous driving. This will require substantial investment in new technologies, regulatory compliance and electrification drive. Led by rejigging of architecture and platforms, the company has rationalised the yearly capital investments requirement to GBP 2.5 billion over the medium term.
Post improvement in FCF in fiscal 2021, fiscal 2022 should see marginal outflow amidst reduced profitability. However, a sharp improvement in FCF is projected for fiscal 2023 owing to higher volumes.
Inherent cyclicality of the domestic CV and PV business The domestic CV business is inherently cyclical, with strong linkage to economic activity. Multiple events such as the increased axle load norms, the Covid-19 pandemic and transition to BS-VI led to a sharp decline in the industry volumes for fiscals 2020 and 2021, reaching a decadal low. Increased infra outlay will support demand for M&HCVs and ILCVs from key end-user sectors such as steel, cement, construction and increased penetration of e-commerce activities will create demand for SCVs. Nevertheless, volumes are still expected to trail the levels seen in fiscal 2018/19. Further, the company is looking to mitigate the cyclicality through increasing the share of exports, scaling up the used vehicle business as well as increase spare and services penetration.
Similar to CV, PV also remains exposed to economic activity. Although the company has gained healthy market share in the past 18 months, it remains susceptible to competition from bigger players and the macro environment. |
Liquidity: Strong Cash accrual is projected at Rs 12,000-13,000 crore and Rs 25,000-28,000 crore for fiscals 2022 and 2023, respectively, adequate to meet yearly debt repayment of Rs 4,850 crore and Rs 11,760 crore. As of September 2021, consolidated cash & equivalents stood at around Rs 44,700 crore besides undrawn bank lines of about Rs 20,000 crore at JLR. Further, fund-based bank lines remain moderately utilised. Capex net research & development expenses of around Rs 20,000 crore each for fiscals 2022 and 2023 is expected to be funded through internal accrual, cash balance and external debt. Additionally, liquidity remains supported by strong financial flexibility, being a part of the Tata group.
ESG Profile CRISIL Ratings believes that TML’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.
The auto sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development. TML has continuously focused on mitigating its environmental and social risks.
TML’s key ESG highlights:
There is growing importance of ESG among investors and lenders. TML’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable TML will continue to benefit from its steady volume growth, improved mix and cost-control measures. Further, moderate capex should support a stable credit risk profile |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company TML is India's largest wholly integrated auto company, manufacturing passenger cars, multi-utility vehicles, and CVs. In June 2008, it acquired JLR, which specialises in manufacturing premium cars, and Land Rover, specialising in premium sports utility vehicles. The PV unit was hived off into a separate subsidiary effective from January 2022 and passenger electric mobility business is housed in a separate subsidiary, TPEML. |
Key Financial Indicators (Consolidated - adjusted by CRISIL Ratings)
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Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
*Fund based facility of State bank of India is interchangeable with non-fund based facility. |
Annexure - List of Entities Consolidated^
^As per annual report of the company for fiscal 2021 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Annexure - Details of Bank Lenders & Facilities
| Facility | Amount (Rs.Crore) | Name of Lender | Rating |
| Fund-Based Facilities* | 2,700 | State Bank of India | CRISIL AA-/Stable |
| Fund-Based Facilities | 50 | Bank of America | CRISIL AA-/Stable |
| Fund-Based Facilities | 450 | Bank of Baroda | CRISIL AA-/Stable |
| Fund-Based Facilities | 1,000 | Citibank N.A. | CRISIL AA-/Stable |
| Fund-Based Facilities | 1,500 | HDFC Bank Limited | CRISIL AA-/Stable |
| Fund-Based Facilities | 100 | ICICI Bank Limited | CRISIL AA-/Stable |
| Fund-Based Facilities | 50 | Standard Chartered Bank Limited | CRISIL AA-/Stable |
| Fund-Based Facilities | 100 | Union Bank of India | CRISIL AA-/Stable |
| Fund-Based Facilities | 50 | Kotak Mahindra Bank Limited | CRISIL AA-/Stable |
| Non-Fund Based Limit | 1,800 | State Bank of India | CRISIL A1+ |
| Non-Fund Based Limit | 300 | HDFC Bank Limited | CRISIL A1+ |
| Non-Fund Based Limit | 850 | ICICI Bank Limited | CRISIL A1+ |
| Non-Fund Based Limit | 100 | Union Bank of India | CRISIL A1+ |
| Non-Fund Based Limit | 50 | Kotak Mahindra Bank Limited | CRISIL A1+ |
| Proposed Fund-Based Bank Limits | 1000 | Not Applicable | Withdrawn |
| Proposed Non Fund based limits | 900 | Not Applicable | CRISIL A1+ |
| Long Term Loan | 1,000 | State Bank of India | CRISIL AA-/Stable |
| Proposed Long Term Bank Loan Facility | 3,000 | Not Applicable | CRISIL AA-/Stable |
This Annexure has been updated on 12-Jan-2022 in line with the lender-wise facility details as on 04-Jan-2022 received from the rated entity.
*Fund based facility of State bank of India is interchangeable with non-fund based facility.
Criteria Details
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