| Tata Motors Passenger Vehicles Limited | ||||||
| Rating outlook revised to 'Positive'; Ratings Reaffirmed | ||||||
| Rating Action | ||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||
| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has revised its outlook on the long-term bank facilities of Tata Motors Passenger Vehicles Limited (TMPVL) to 'Positive’ from ‘Stable’ while reaffirming the rating at ‘CRISIL AA‘. The rating on the short-term facilities has been reaffirmed at ‘CRISIL A1+’.
The revision in outlook follows similar rating action in TML driven by the expectation that the improvement in Jaguar Land Rover (JLR) volume, revenue and operating margin seen in the first half of fiscal 2024 may sustain resulting in an improvement in the consolidated business and financial profile. The improvement in operating performance in the first half of fiscal 2024 was due to strong volume growth in JLR with healthy order book providing visibility over the near to medium term. Further the improved revenue mix in terms of higher margin products and operating leverage resulting from improved volumes have led to sharp recovery in EBITDA margins for the JLR business. This, along with reduction in gross debt, has led to a sharp improvement in the financial profile. Adjusted net debt to EBITDA could reduce to less than 1x by fiscal 2024 from around 1.9 times in fiscal 2023 and 2.7 times for fiscal 2022 as per CRISIL Ratings’ adjusted figures.
The ratings continue to reflect the improving market position of TMPVL in the domestic passenger vehicle (PV) market and its healthy financial risk profile. They also factor in the strong financial and managerial support expected from TML, given the strategic importance of TMPVL. These strengths are partially offset by modest operating efficiency and susceptibility to intense competition and cyclicality in the automobile industry.
Over the last three years, the company has seen a healthy improvement in its operations, driven by new launches, product re-engineering and expansion in footprint, leading to increased reliability and acceptance among customers. As a result, volume has grown by around 45% year-on-year in fiscal 2023 while reported market share has improved to nearly 13.5% (11.4% in fiscal 2022). The company continues to be the market leader in the domestic electric vehicle market with reported market share of 73.4% in first half of fiscal 2024. Strong volume, coupled with an enhanced product mix, has led to EBITDA margin rising to 6.4% in fiscal 2023 from a negative -9.4% in fiscal 2020.
As per CRISIL Ratings’ estimates, the outlook remains favorable with healthy volume growth. Sustenance of margins with increasing proportion of EV sales will be a key monitorable. |
Key Rating Drivers & Detailed Description Strengths: Improving market position in the domestic PV market: TMPVL has gained market share over the past 3 years, with new product launches, product re-engineering and timely refreshers of existing models, resulting in increased reliability and acceptance among the customers. As of March 2023, it had a reported market share 13.5% (, which is about 210 basis points higher in comparison to March 2022. Both utility vehicle (UV) and car segments contribute strongly, with Nexon and Punch (UVs) and Tiago and Altroz (cars) accounting for around 75% of total sales. The volume growth should remain healthy over the medium term with sustained demand and unlocking capacity.
Healthy financial risk profile: TMPVL is debt-free apart from a term debt (from government of Gujarat) of Rs 223 crore. When the PV entity was hived off from TML, debt was not transferred, mainly to support the new entity in the initial stabilisation phase. Further, repayment of term debt will commence from March 2033, thereby enabling the company to replenish cash and reduce reliance on external debt. With the transfer of the electric vehicle business into a separate entity, TMPVL will not be burdened by the large capital expenditure (capex) requirement. Hence, debt protection metrics will remain strong over the medium term.
Strong financial and managerial support from TML: TMPVL was formed as a result of hiving off of the PV unit of TML into a separate entity. Operations and treasury are closely integrated with the parent. TMPVL continues to be of strategic importance to TML and will play a central role in the growth strategy of TML and also receive strong support from the parent.
Weakness: Modest operational efficiency: Till fiscal 2020, the PV business was performing sub-optimally with weak EBITDA margin (negative 12.3%, 0.1% and negative 9.4% in fiscals 2018, 2019 and 2020, respectively). Low utilisation rates and the adverse product mix led to a significant cash burn. In fiscal 2021, despite the Covid induced headwinds, the margin turned positive to 2.2%, led by strong volume growth and cost rationalisation measures. The margin improved further to 5.3% in fiscal 2022 and 6.4% in fiscal 2023, driven by strong volume growth resulting in favourable operating leverage. CRISIL Ratings expects the EBITDA margin to sustain at 6-7% over the medium term, backed by higher capacity utilisation, a favourable product mix and continued cost rationalisation measures but partly offset by higher mix of EV in overall sales which has been reporting EBITDA losses.
Susceptibility of profitability and market share to intense competition and cyclicality: The Indian PV market remains highly competitive, with players launching new models regularly, especially in the compact, mid-sized and UV segments. With more players vying for a share of the growing pie, competition in the domestic PV market will intensify. Nevertheless, the market is highly concentrated amongst four large players, which have over 75% of the market share. CRISIL Ratings believes the market position and operating margin of the company will hinge on its ability to consistently launch new variants and models.
Although TMPVL has outperformed the major players and garnered sizeable market share, it remains vulnerable to competition and inherent cyclicality in the industry. |
Liquidity: Strong As per CRISIL Ratings’ estimates, net cash accrual of Rs 3,500-4,500 crore per fiscal in 2024 and 2025, will more than suffice to cover the yearly capex of Rs 2500-3000 crore. Furthermore, absence of any term debt servicing in the next few years will also bolster the cash generation ability. As of March 2023, the fund-based limits were unutilised. Need-based support from the parent enhances the liquidity position. |
Outlook: Positive TMPVL will remain strategically important to TML and hence, continue to receive strong managerial and financial support from the parent over the medium term. |
Rating Sensitivity Factors Upward Factors
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About the Company TMPVL was formed as a result of transfer of the PV unit of TML to a newly formed entity in fiscal 2021. It is 100% owned by TML and its subsidiaries. Manufacturing facilities are at Sanand (Gujarat) and Pune (Maharashtra). |
Key Financial Indicators
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Any other information: Not Applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Interchangeable between fund-based and non-fund-based limits |
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Criteria Details
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