Rating Rationale
August 14, 2019 | Mumbai
Tata Motors Limited
Long-term rating downgraded to 'CRISIL AA-/Negative' ; short-term rating reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.15000 Crore
Long Term Rating CRISIL AA-/Negative (Downgraded from 'CRISIL AA/Negative')
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.1000 Crore Short Term Debt CRISIL A1+ (Reaffirmed)
Rs.6000 Crore Commercial Paper CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has downgraded its rating on the long-term bank facilities of Tata Motors Limited (TML) to 'CRISIL AA-/Negative' from 'CRISIL AA/Negative'. The rating on the short term bank facility,commercial paper and short-term debt has been reaffirmed at 'CRISIL A1+'.

The rating downgrade factors in a further weakening of outlook on the business risk profile of Jaguar Land Rover Automotive PLC (JLR). CRISIL expects JLR's global volumes to increase marginally by 1-2% in fiscal 2020 versus an expectation of about 5% earlier, mainly due to continued weakness in the China market. Continued weak sales volumes and profitability, coupled with sizeable necessary capex continues to constrain the outlook for free cash flows. Moreover, continued uncertainty around the terms on which Brexit is concluded continues to pose risks to JLR's business profile. An adverse outcome on Brexit for JLR may result in significant disruptions to its supply chain, and elongate its working capital cycle.

JLR's wholesale volumes declined about 10.8% in fiscal 2019 over the previous fiscal, and were about 10% lower year on year in Q1 fiscal 2020. Reduction in volumes have been largely driven by slowdown in China, ongoing uncertainties around diesel vehicles in Europe, and weaker volumes in overseas markets. Given the high operating leverage in this business, declining volumes have impacted profitability, reflected in operating margins of 8.2% in fiscal 2019 and 4.2% in Q1 fiscal 2020, down from 10.8% in fiscal 2018 and 6.2% in Q1 fiscal 2019. Increase in product related warranty costs and continued pressure on pricing have also constrained JLR's profitability.

High level of investments should result in negative FCF to the tune of GBP 500 mn to GBP 1 billion for fiscal 2020, while free cashflows are now expected to remain negative up to fiscal 2021. CRISIL, in its base case, expects TML's consolidated net-debt-to-EBITDA to remain elevated at about 2.4 times in fiscal 2020 and 2021, from about 2 times for fiscal 2019 (fiscal 2020 and 2021 leverage ratios include the impact of IFRS 16). JLR sales volumes are expected to increase marginally in the current fiscal, while margins should improve slightly over the previous fiscal.

The rating may be downgraded in case of further deterioration of business environment, significantly impacting JLR's volumes and profitability. A higher than expected deterioration in consolidated Net debt/EBIDTA and expectation of it sustaining over 3.2 times over fiscal 2020 and 2021 may also result in a downgrade of rating. 

Nevertheless, the rating is supported by measures being taken by management at JLR, to turn around volumes and preserve cash flows with its 'Project Charge' initiative.

The management is focusing on turning around its operations in China, mainly via dealer level initiatives such as reducing inventory levels and improving their return on sales. These measures, as well as the impact of base-effect and the upcoming launch of Land Rover Defender should result in marginally higher retail volume sales in fiscal 2020, despite poor sales in Q1 fiscal 2020.

The management has targeted cash-flow preservation of GBP 2.5 billion over H2 fiscal 2019 and fiscal 2020, of which it has reported saving GBP 1.7 billion till Q1 fiscal 2020. This includes targeted cost savings of GBP 1 billion, via reduction in employee costs, material cost improvements, and reductions in other overheads. These measures are expected to result in a slight improvement in operating margins in fiscal 2020. Apart from cost control, the initiative includes working capital management, and reduction in investments via stricter capital budgeting.

The rating continues to factor in the improving product portfolio of JLR, and its diversified global presence. Furthermore, TML's strong market position in the domestic CV segment, healthy financial flexibility marked by large cash balances, and support from the Tata group in case of need also support the rating.

Analytical Approach

CRISIL 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 Company Ltd (CJLR) in proportion to its shareholding.

CRISIL has made adjustments as per its capital allocation approach for the assets and liabilities of TML's financing business, conducted by captive finance subsidiary Tata Motors Finance Ltd (TMFL).

To arrive at net debt, CRISIL has reduced the surplus cash of TML and debt of TMFL from the consolidated debt of TML. CRISIL has added acceptances to debt, while Bills discounted outstanding are not included. Surplus cash is defined as cash exceeding Rs 15,000 crore, which is expected to be required for smooth functioning of JLR/domestic business.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered.

Key Rating Drivers & Detailed Description
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. 
 
* Strong market position in CVs; weak but improving performance in PVs
TML's domestic business comprising both commercial (CV) and passenger (PV) vehicles, has demonstrated significant improvement in profitability, despite market challenges. In the CV segment, the company is consolidating its position as the largest player with a market share of 45% in fiscal 2019. In its PV segment, the company has increased its market share to 6.3% in the fiscal 2019 from 5.7% in the previous fiscal. TML's standalone profitability improved to 8.2% in fiscal 2019 from 5.9% in fiscal 2018 and 3.7% in fiscal 2017.

The company is focused on achieving healthy volume growth, reduction in costs, better dealer management, improving product portfolio and working capital efficiency. These measures should continue to drive improvement in the company's domestic business over the medium term. However, the company now faces a challenging business environment given a sharp slowdown in India's automotive industry, impacting near to medium term outlook. In Q1 fiscal 2020, retail volumes declined 14.8% for CVs, and 7.4% for PVs year-on-year. Demand is expected to remain subdued for both CVs, and PVs up to fiscal 2021.
 
* Healthy financial flexibilities, including the benefit of being a part of the Tata Group
Debt protection indicators are expected to remain adequate going ahead. Liquidity profile remains healthy, reflected in adequate cash surplus, significant unutilized fund based facilities, coupled with back-ended debt repayment. Working capital cycle has also remained negative over the years primarily because of high trade payables. While CRISIL expects this to continue over the medium term, any large variation will be a key monitorable. Tata Motors' financial flexibility also benefits from being one of the flagship companies of the Tata Group. Group Chairman Mr. N. Chandrasekaran is also on the board of Tata Motors and JLR.  
   
Weaknesses
* Weak operating performance at JLR owing to challenging market conditions and elevated business risks
JLR's operating profile is expected to remain constrained by challenging market conditions in its key markets, especially China and Europe. This may result in JLR's operating margins remaining subdued ' with only a slight improvement anticipated in fiscal 2020 over the previous year. JLR also faces business risks related to terms on which Brexit is finalized ' with risk of restrictions on free movement of goods and manpower coupled with tariff barriers between UK and EU ' resulting in higher costs and an elongated working capital cycle. Nonetheless, favourable currency movements could partly mitigate the impact of tariffs.

Moreover, JLR's business profile 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 does not have manufacturing capacity in this geography. CRISIL will continue to monitor the developments on these fronts.
 
* Large capex at JLR to result in negative free operating 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's preference is shifting towards new technologies such as connected cars and autonomous driving. JLR has limited flexibility to defer its sizable capex without impacting its planned launches or investments in technology, which are critical to sustain its market position.

JLR's large capex, along with constrained profitability is expected to result in negative free operating cash flows (FOCF) in the range of GBP 500 million to GBP 1 billion for fiscal 2020. This is likely to result in sustained high consolidated leverage, with net debt/EBITDA expected at about 2.4 times by end-March 2020 and remain elevated at a similar level by March 31, 2021 (fiscal 2020 & 2021 include impact of IFRS-16); from 2 times as of March 2019, and 1.2 times as of March 2018. In this context, success of the new launches and improvement in company's operating leverage will be a key monitorable.
Liquidity

TML, at a consolidated level, has adequate liquidity, driven by expected cash accruals of about Rs 27,000 crore in fiscal 2020. As on June 30, 2019, the company had total liquidity of about Rs 46,500 crore which includes cash and cash equivalents of about Rs 28,000 crore and unutilized RCF facilities of about Rs 18,500 crore. Against this, the company has long term repayment obligations of around Rs 8,200 crore in fiscal 2020. CRISIL expects internal accruals, cash & cash equivalents and unutilized credit lines to be sufficient to meet its repayment obligations.

Liquidity of TML's standalone business is also adequate. The business is expected to generate cash accruals of about Rs 3,500 crore in fiscal 2020, and has liquidity available of about Rs 3,930 crore as of June 30, 2019 (including unutilised RCF of Rs 1,500 crore). Moreover, it has access to about Rs. 8,000 crore fund based limits which remain moderately utilized. The company has long term repayment obligations of around Rs 1,000 crore in fiscal 2020, which are likely to be serviced comfortably from available resources.

Outlook: Negative

CRISIL believes TML's consolidated profitability will remain constrained in the medium term by the challenging market conditions faced by JLR. Therefore, improvement in volumes, stepped-up cost control measures and efficient capital budgeting will be critical for maintaining TML's credit risk profile.

Upside Scenario
* Improvement in business profile of JLR in key markets and volume growth which results in a significant, sustained increase in its free operating cash flows. In particular, expectation of positive free cashflows at JLR to sustain from fiscal 2021 onwards will be favourable. 

Downside Scenario
* Further deterioration in business environment, severely impacting JLR's volumes and profitability. This includes continued uncertainty related to Brexit.
* A higher than expected deterioration in consolidated Net debt/EBIDTA and expectation of it sustaining over 3.2 times over fiscal 2020 and 2021.
* Expectation of continued negative free cashflows at JLR till fiscal 2022.

About the Company

TML is India's largest wholly integrated automotive company, manufacturing passenger cars, multi-utility vehicles, and CVs. In June 2008, it acquired JLR which specializes in manufacturing of premium cars and Land Rover specializes in premium sports utility vehicles (SUVs).

In fiscal 2019, JLR contributed 74% and 70% of TML's revenue and EBITDA, respectively.

Key Financial Indicators: TML (Consol) 
Particulars Unit 2019 2018
Revenue Rs. Cr. 301,938 292,341
Profit After Tax (PAT) Rs. Cr. (28,724) 9,091
PAT Margins % -9.5% 3.1%
Interest coverage Times 6.1 10.7
Net Debt/Adjusted Networth Times 1.0 0.4

Any other information: Not applicable

Note on complexity levels of the rated instrument:
CRISIL complexity levels are assigned to various types of financial instruments. The CRISIL complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL 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)
ISIN Name of Instrument Date of Allotment Coupon Rate (%) Maturity Date Issue Size (Rs.Cr) Rating Assigned  with Outlook
NA Short-Term Debt NA NA 7-365 days 1000 CRISIL A1+
NA Commercial Paper NA NA 7-365 days 6000 CRISIL A1+
NA Fund-Based Facilities NA NA NA 8000 CRISIL AA-/Negative
NA Non-Fund Based Limit* NA NA NA 6000 CRISIL A1+
NA Fund-Based Facilities^ NA NA NA 1000 CRISIL AA-/Negative
^Committed credit facility
*Limits are fully interchangeable
 
Annexure - List of Entities Consolidated
Fully Consolidated Entities:
Sl. No. Name of entity
1 Concorde Motors (India) Limited
2 TAL Manufacturing Solutions Limited
3 Tata Motors European Technical Centre PLC
4 Tata Motors Insurance Broking and Advisory Services Limited
5 TML Holdings Pte Ltd
6 TML Distribution Company Limited
7 Tata Hispano Motors Carrocera S.A.
8 Tata Hispano Motors Carrocerries Maghreb SA
9 TMF Holdings Limited
10 TML Drivelines Limited
11 Trilix S.r.l
12 Tata Precision Industries Pte Ltd
13 Tata Technologies Limited
14 Tata Marcopolo Motors Limited
15 Tata Daewoo Commercial Vehicle Company Limited
16 Tata Motors (Thailand) Ltd
17 Tata Motors (SA)(Proprietary) Ltd
18 PT Tata Motors Indonesia
19 Jaguar Land Rover Automotive Plc
20 TMNL Motor Services Nigeria Limited
21 Tata Technologies Pte Limited
22 Tata Motors Finance Solutions Limited
23 Tata Motors Finance Limited
24 Tata Daewoo Commercial Vehicle Sales and Distribution Company Limited
25 PT Tata Motors Distribusi Indonesia
26 Jaguar Land Rover Holdings Limited
27 Tata Technologies (Thailand) Limited
28 Tata Manufacturing Technologies (Shanghai) Co. Ltd
29 INCAT International Plc
30 Jaguar Land Rover Limited
31 Jaguar Land Rover (China) Investment Company Limited
32 Limited Liability Company 'Jaguar Land Rover' (Russia)
33 INCAT GmbH
34 Tata Technologies Europe Limited
35 JLR Nominee Company Limited
36 Jaguar Cars South Africa (Pty) Limited
37 The Jaguar Collection Limited
38 Jaguar Cars Limited
39 Land Rover Exports Limited
40 Land Rover Ireland Limited
41 The Diamler Motor Company Limited
42 Diamler Transport Vehicles Limited
43 S.S Cars Limited
44 The Lanchester Motor Company Limited
45 Jaguar Land Rover Pension Trustees Limited
46 Spark 44 (JV) Limited
47 Jaguar Land Rover Austria GmbH
48 Jaguar Land Rover Japan Limited
49 Jaguar Land Rover Deutschland GmbH
50 Jaguar Land Rover North America LLC
51 Jaguar Land Rover Nederland BV
52 Jaguar Land Rover Portugal - Veiculose Pecas, Lda
53 Jaguar Land Rover Australia Pty Ltd
54 Jaguar Land Rover Italia SpA
55 Jaguar Land Rover Korea Company Limited
56 Jaguar Land Rover Canada ULC
57 Jaguar Land Rover France, SAS
58 Jaguar Land Rover India Limited
59 Jaguar e Land Rover Brasil Industria e Comercio de Veiculos LTDA
60 Jaguar Land Rover (South Africa) Holdings Limited
61 Jaguar Land Rover Espana SL
62 Jaguar Land Rover Belux N.V.
63 Jaguar Land Rover Slovakia s.r.o
64 Jaguar Land Rover Singapore Pte Ltd
65 Jaguar Racing Limited
66 InMotion Ventures Limited
67 Jaguar Land Rover Colombia S.A.S
68 Jaguar Land Rover Ireland (Services) Limited
69 Jaguar Land Rover Taiwan Company Limited
70 Jaguar Land Rover Servicios Mexcio S.A. de C.V.
71 Jaguar Land Rover Mexico S.A.P.I de CV
72 Shanghai Jaguar Land Rover Automotive Services Company Limited
73 Tata Technologies Inc
74 Escenda Engineering AB
75 Spark 44 (Pty) Ltd (Sydney, Australia)
76 Spark 44 GmbH (Frankfurt, Germany)
77 Spark 44 LLC (LA & NYC, USA)
78 Spark 44 Limited (Shanghai, China)
79 Spark 44 DMCC (Dubai, UAE)
80 Spark 44 Demand Creation Partners Private Limited (Mumbai, India)
81 Spark 44 Limited (London & Birmingham, UK)
82 Spark 44 Pte Ltd (Singapore)
83 Spark 44 Communications SL (Madrid, Spain)
84 Spark 44 S.r.l (Rome, Italy)
85 Spark 44 Seoul Limited (Korea)
86 Spark 44 Japan K.K. (Tokyo, Japan)
87 Spark 44 Canada Inc (Toronto)
88 Spark 44 Pty. Limtied (South Africa)
89 Tata Technologies de Mexico, S.A. de C.V.
90 Cambric GmbH
91 Cambric Limited
92 Jaguar Land Rover (South Africa) (Pty) Limited
93 InMotion Ventures 1 Limited
94 InMotion Ventures 2 Limited
95 InMotion Ventures 3 Limited
96 Tata Technologies SRL Romania
97 Chery Jaguar Land Rover Automotive Company Limited (Joint Venture) (in proportion to its holding)
Annexure - Rating History for last 3 Years
  Current 2019 (History) 2018  2017  2016  Start of 2016
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  6000.00  CRISIL A1+  14-02-19  CRISIL A1+  12-10-18  CRISIL A1+  29-12-17  CRISIL A1+    --  -- 
            19-09-18  CRISIL A1+           
Short Term Debt  ST  1000.00  CRISIL A1+  14-02-19  CRISIL A1+  12-10-18  CRISIL A1+  29-12-17  CRISIL A1+  03-10-16  CRISIL A1+  CRISIL A1+ 
            19-09-18  CRISIL A1+  31-10-17  CRISIL A1+       
Fund-based Bank Facilities  LT/ST  9000.00  CRISIL AA-/Negative  14-02-19  CRISIL AA/Negative  12-10-18  CRISIL AA/Stable  29-12-17  CRISIL AA/Positive  03-10-16  CRISIL AA/Positive  CRISIL AA/Stable 
            19-09-18  CRISIL AA/Stable  31-10-17  CRISIL AA/Positive       
Non Fund-based Bank Facilities  LT/ST  6000.00  CRISIL A1+  14-02-19  CRISIL A1+  12-10-18  CRISIL A1+  29-12-17  CRISIL A1+  03-10-16  CRISIL AA/Positive/ CRISIL A1+  CRISIL AA/Stable/ CRISIL A1+ 
            19-09-18  CRISIL A1+  31-10-17  CRISIL AA/Positive/ CRISIL A1+       
All amounts are in Rs.Cr.
Annexure - Details of various bank facilities
Current facilities Previous facilities
Facility Amount (Rs.Crore) Rating Facility Amount (Rs.Crore) Rating
Fund-Based Facilities 8000 CRISIL AA-/Negative Fund-Based Facilities 8000 CRISIL AA/Negative
Fund-Based Facilities^ 1000 CRISIL AA-/Negative Fund-Based Facilities^ 1000 CRISIL AA/Negative
Non-Fund Based Limit* 6000 CRISIL A1+ Non-Fund Based Limit* 6000 CRISIL A1+
Total 15000 -- Total 15000 --
^Committed credit facility
*Limits are fully interchangeable
Links to related criteria
CRISILs Approach to Financial Ratios
Rating criteria for manufaturing and service sector companies
Rating Criteria for Commercial Vehicle Industry
CRISILs Bank Loan Ratings
CRISILs Criteria for Consolidation
CRISILs Criteria for rating short term debt

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