Rating Rationale
September 19, 2018 | Mumbai
Tata Motors Limited
Rating outlook revised to 'Stable'; ratings reaffirmed
 
Rating Action
Total Bank Loan Facilities Rated Rs.15000 Crore (Enhanced from Rs.14000 Crore)
Long Term Rating CRISIL AA/Stable (Outlook revised from 'Positive' and rating reaffirmed)
Short Term Rating CRISIL A1+ (Reaffirmed)
 
Rs.1000 Crore Short Term Debt (Enhanced from Rs.500 Crore) CRISIL A1+ (Reaffirmed)
Rs.6000 Crore Commercial Paper (Enhanced from Rs.4500 Crore) CRISIL A1+ (Reaffirmed)
1 crore = 10 million
Refer to annexure for Details of Instruments & Bank Facilities
Detailed Rationale

CRISIL has revised its rating outlook on the long-term bank facilities of Tata Motors Limited (TML) to 'Stable' from 'Positive', while reaffirming the rating at 'CRISIL AA'. The rating on the short-term bank facilities, short term debt and commercial paper has been reaffirmed at 'CRISIL A1+'.

The revision in outlook is driven by a weaker outlook on the operating performance of Jaguar Land Rover Automotive PLC (JLR) in terms of sales volumes, operating profitability and cash flow generation. This is mainly on account of challenging conditions in key markets including the UK, Europe and North America.

JLR's retail volumes growth slowed to about 2% for FY2018, and volumes declined by about 1.7% in FY2019 YTD (April-August). Slower growth and high competitive intensity may constrain JLR's operating margins to below 12% in FY2019 vis-Ã'' -vis CRISIL's previous expectations of 14-15%. Moreover, large capital expenditure (capex) requirement of more than GBP 4 bn per annum is likely to result in negative free cash flows over the medium term. Final terms on which Brexit is concluded, and imposition of stringent tariffs on auto imports by the US may continue to pose risks to JLRs business profile.

However, ratings are supported by measures being taken by management towards cost control. These include improving efficiency via initiatives such as in-sourcing of engines and use of modular longitudinal architecture, optimizing supply base, and reduction of corporate & administrative costs. Furthermore, the management is also undertaking a stricter capital budgeting approach, with capex cuts in projects of relatively low strategic importance. Success of these measures as well as successful ramp-up of its recent launches such as RR Velar and E-Pace will remain key monitorables.

TML's domestic business comprising both Commercial (CV) and Passenger (PV) vehicles showed significant improvement, in terms of market share and profitability. Moreover, JLR's product portfolio has improved over the last few years, with new model launches resulting in higher product diversity with better penetration across various price points. The rating continues to derive strength from its strong consolidated financial profile marked by a healthy capital structure, large cash balance and strong financial flexibilities.

Analytical Approach

For arriving at its ratings, CRISIL has combined the business risk profiles of TML and its subsidiaries, including JLR and its joint venture Chery Jaguar Landrover Automotive Company Limited (CJLR) in proportion of its holding. CRISIL has made adjustments for the assets and liabilities of TML's financing business, conducted by captive finance subsidiary Tata Motors Finance Ltd (TMFL; 'CRISIL AA/CRISIL A+/Stable/CRISIL A1+'). 

Key Rating Drivers & Detailed Description
Strengths
* Robust product portfolio and strong brand in the global luxury automotive segment
Jaguar and Land Rover are iconic brands with a rich heritage in the premium luxury segment. JLR's strong product development capabilities have enabled successful product launches and expansion into new segments, thus enhancing its product portfolio. This supports diversification of potential growth drivers thereby enhancing company's business profile. 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
Tata Motors' domestic business has displayed a strong turnaround in performance ' While in CVs, the company is consolidating its position as the largest player with a market share of 45.1%, its   PV segment, though small is also showing a strong growth outlook.

This is led by organization level changes, better dealer engagement, improved service levels and cost control, along with improvement of product portfolio via new model launches. TML's standalone profitability has improved to 6.2% in 2017-18 vis-Ã'' -vis 3.7% in the previous year. CRISIL believes that industry upswing in CVs and success of new launches will continue to drive improvement in company's domestic business.

* Strong financial risk profile
The strong financial risk profile is reflected in healthy capital structure with adjusted gearing of 0.5 times as on March 31, 2018, robust liquidity with cash and cash equivalent of about Rs.50,000 crore coupled with back-ended debt repayment. Debt protection indicators are expected to remain healthy going ahead, with interest cover at about 9.5-10 times expected for FY2019. Additionally, the financial risk profile is supported by high financial flexibility as part of the Tata group and demonstrated ability to deleverage inorganically. Working capital requirement has been 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.

Weaknesses
* Weak operating performance at JLR owing to challenging market conditions and increased business risks
JLR's operating performance remained weak in fiscal 2018, reflected in retail volume growth of about 2%, and operating profitability lower than 12%. Going ahead, JLR's operating profile is expected to remain constrained by challenging market conditions in its key markets. High competitive intensity, especially in North America has impacted pricing, while uncertainty regarding diesel vehicles in Europe and UK are weighing down on sales volumes in these markets. These factors are expected to result in much lower volume growth, vis-Ã'' -vis earlier expectations of 10-12% growth.

JLR faces business risks related to terms on which Brexit is finalized' with risk of severe restrictions on movement of goods and manpower, and tariff barriers between UK and countries in the EU.  Moreover, JLR's business profile remains exposed to the threat of imposition of stringent tariffs on auto imports in the US ' this may impact the company's volumes and profitability in this key market. 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. JLR is scaling up capex to enhance its product portfolio (including technology), improve its engine manufacturing capability, and expand its manufacturing footprint. The global auto industry is rapidly evolving with higher regulatory focus on electric vehicles and stringent emission norms, and consumer preference shifting towards new technologies such as connected cars and autonomous driving. JLR has limited flexibility to defer its capex without impacting its planned launches or investments in technology, which is critical for its market position.

JLR's large capex, along with constrained profitability is expected to result in negative free operating cash flows (FOCF) till at least fiscal 2020. This is likely to result in higher consolidated leverage, with adjusted debt/EBITDA expected to increase to close to 2x in the medium term, from about 1.2x in fiscal 2018. In this context, success of the capex and improvement in company's operating leverage will be a key monitorable.
Outlook: Stable

CRISIL believes TML's consolidated profitability may remain constrained in the medium term due to the challenging market conditions faced by JLR. However stepped up cost control measures and efficient capital budgeting may help Tata Motors to sustain its credit profile.

Upside Scenario
* Healthy and diversified growth in JLR volumes along with improvement in profitability
* Sustained strong financial profile with improved operating leverage and lower capex intensity

Downside Scenario
* Further weakening of operating profitability with slower growth
* Larger debt-funded capex, leading to moderation in its financial risk profile.

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 2018, JLR accounted for 80% and 79% of TML's revenue and earnings before interest, tax, depreciation, and amortisation (EBITDA), respectively.

Key Financial Indicators
Particulars Unit 2018 2017
Revenue Rs. Cr. 294,243 269,850
Profit After Tax (PAT) Rs. Cr. 9,091 7,557
PAT Margins % 3.1% 2.8%
Interest coverage Times 10.8 12.1
Adjusted Debt/Adjusted Networth Times 0.5 0.5

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.Crore) 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/Stable
NA Non-Fund Based Limit NA NA NA 6000 CRISIL A1+
NA Proposed Fund-Based Bank Limits NA NA NA 1000 CRISIL AA/Stable
Annexure - Rating History for last 3 Years
  Current 2018 (History) 2017  2016  2015  Start of 2015
Instrument Type Outstanding Amount Rating Date Rating Date Rating Date Rating Date Rating Rating
Commercial Paper  ST  6000.00  CRISIL A1+      29-12-17  CRISIL A1+    --    --  -- 
Non Convertible Debentures  LT    --    --    --    --  14-09-15  Withdrawn  CRISIL AAA(SO)/Stable 
Short Term Debt  ST  1000.00  CRISIL A1+      29-12-17  CRISIL A1+  03-10-16  CRISIL A1+  14-09-15  CRISIL A1+  CRISIL A1+ 
            31-10-17  CRISIL A1+           
Fund-based Bank Facilities  LT/ST  9000.00  CRISIL AA/Stable      29-12-17  CRISIL AA/Positive  03-10-16  CRISIL AA/Positive  14-09-15  CRISIL AA/Stable  CRISIL AA/Stable 
            31-10-17  CRISIL AA/Positive           
Non Fund-based Bank Facilities  LT/ST  6000.00  CRISIL A1+      29-12-17  CRISIL A1+  03-10-16  CRISIL AA/Positive/ CRISIL A1+  14-09-15  CRISIL AA/Stable/ CRISIL A1+  CRISIL AA/Stable/ 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/Stable Bank Guarantee 4506 Withdrawn
Non-Fund Based Limit 6000 CRISIL A1+ Fund-Based Facilities 8000 CRISIL AA/Positive
Proposed Fund-Based Bank Limits 1000 CRISIL AA/Stable Non-Fund Based Limit 6000 CRISIL A1+
Total 15000 -- Total 18506 --
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 rating short term debt

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