Fitch downgrades Tata Motors over Covid effect

By: |
April 17, 2020 1:25 AM

In India, auto industry conditions remain weak, with sales volume for passenger as well as commercial vehicles declining by more than 15% and 25%, respectively, in FY20.

Fitch estimates that Tata Motors’ consolidated Ebitda generation will drop by nearly 50% year-on-year in the financial year .

Fitch Ratings on Thursday downgraded the Long-Term Issuer Default Rating (IDR) of Tata Motors to ‘B’ from ‘BB-’. The downgrade reflects the rating agency’s significantly lower expectations for Tata Motors’ profitability and cash flow over the next few years due to the effect of the coronavirus pandemic on demand and disruption to its Indian operations, as well as to key auto markets globally that are served through its fully owned UK-based subsidiary, Jaguar Land Rover Automotive. Data from Bloomberg showed that total debt of Tata Motors stood at `95,465 crore as on December 2019.

Fitch estimates that Tata Motors’ consolidated Ebitda generation will drop by nearly 50% year-on-year in the financial year ending March 2021 and will remain below FY19 levels in FY22, even with a recovery. “We expect sharp deterioration in Tata Motors free cash generation and leverage, as the company will have limited flexibility to lower heavy investment, despite lower profitability, particularly at JLR, as it needs to bolster its long-term competitiveness in view of emerging industry trends,” said Fitch in its release.

In the last one year, Tata Motors’ stock has given negative returns of 59.7%, while in the last six months it has been down by 40.7%. “Coronavirus mitigation measures, including shutdowns, have affected TML’s operations globally. Fitch has sharply cut its global economic growth forecasts and expects a deep global recession in 2020. This will cause double-digit falls in new auto sales and hurt TML’s profitability due to lower absorption of fixed costs, despite some flexibility,” said the rating agency in its key rating drivers. The outlook of Tata Motors is negative.

In India, auto industry conditions remain weak, with sales volume for passenger as well as commercial vehicles declining by more than 15% and 25%, respectively, in FY20. The fall in TML’s volume has been even sharper, at 35%. The pandemic will further weaken demand in FY21, as it will compound higher ownership costs following the implementation of stricter BS6 emission norms.

The rating agency believes that Tata Motors will have limited flexibility to meaningfully cut capex over the medium-term for new product development and alternative platforms, because it needs to sustain its long-term competitiveness, particularly in its JLR business. This will increase negative FCF over the medium term compared with the rating agency’s previous expectation and raise dependence on debt issuance and refinancing.

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