Tata Motors Credit Rating downgraded to B by S&P
Credit rating agency Standard & Poor's stated today that it had lowered its long term corporate credit rating on India based Tata Motors to 'B' from 'B+' following diminished performance of Jaguar and Land Rover (JLR).
In addition, the agency has kept the outlook negative for the company. At the same time, S&P has lowered the issue rating on the company's senior unsecured notes to 'B' from 'B+'.
Suzanne Smith, credit analyst, Standard & Poor's, said, "We lowered the rating on Tata Motors to reflect the challenging operating performance at Jaguar and Land Rover (JLR) for the year ended March 31, 2009, and our expectations of a similar operating performance in financial year 2010. This, along with a high debt level, has placed significant pressure on Tata Motors' consolidated financial metrics".
The company had an adjusted ratio of debt to Ebitda (earning before interest, tax, depreciation and amortisation) of more than 10x and a ratio of funds from operation to total debt of 3 per cent in financial year 2009. The report further stated that the rating on Tata Motors also reflects the company's exposure to cyclical demand for commercial vehicles, intense competition in the passenger vehicle business, and changing consumer preferences for automobiles in developed countries. These challenges are partly offset by the company's dominant market position in the Indian commercial vehicle market and its relatively good financial flexibility.
"We expect JLR's weak operating performance to continue in fiscal 2010, due to tough market conditions. JLR derives more than 75 per cent of its sales from developed markets and contributes more than 50 per cent of Tata Motors' consolidated revenue. Tata Motors' overall operating performance was weak in fiscal 2009 (ended March), due to a 13.5 per cent year-on-year decline in volumes for India operations and 32 per cent for JLR (June 2008 to March 2009), resulting in an adjusted EBITDA margin of about 3 per cent. The operating margin in India declined to 6.1 per cent in fiscal 2009 from 9.6 per cent a year earlier," stated the report.
"The recovery in the Indian auto market that started in January 2009 offers some support for the rating on Tata Motors, given its strong market position. In fiscal 2010, we expect the operating performance of Indian operations to improve, driven by higher sales, improved product mix, and lower commodity prices," said Smith.
Tata Motors' financial profile is highly leveraged with weak cash flows and higher debt levels post the acquisition of JLR. We expect the company's debt levels to gradually reduce, given its commitment to deleveraging through divestments, raising capital, and cutting capital expenditure and working capital requirements.
However, we believe that Tata Motors has limited scope to reduce capital expenditure, even though partly uncommitted, because of its need to invest in new and existing products to maintain its market position in the highly competitive auto industry. Also, the company faces execution risk for its divestments and capital-raising plans.
The negative outlook reflects our view on the uncertainty over when JLR's operating performance will improve, given the weak global auto market conditions. It also factors in Tata Motors' highly leveraged financial risk profile, given extremely high debt levels, including a high level of short-term debt, even after it refinanced a bridge loan, said the report.