Global ratings agency Fitch Ratings on Thursday said it has revised the outlook on Tata Motors to ‘negative’ from ‘stable’ on expectations that higher capital spending at Jaguar Land Rover will result in negative free cash flow in the current and the next financial year. The revision has come basically because the ratings agency expects that JLR’s continuing large investments will keep Tata Motors’ free cash flow negative over FY19 and FY20, compared with earlier expectations of them turning positive by FY20.
It said that free cash flow fell significantly in FY18 to negative 4.2% and will further decrease to around negative 6% in FY19.
Fitch affirmed the long-term issuer default rating of Tata Motors’ at ‘BB+’. The ratings agency said in a statement that it believes that a disorderly Brexit could significantly disrupt JLR’s supply chain and affect the company’s earnings and cash generation.
Last week, Fitch had revised its outlook on JLR from ‘stable’ to ‘negative’.
The ratings agency oulined similar grounds projecting a further fall in JLR’s free cash flow over the next two years.
On Tata Motors, Fitch said on Thursday that free cash flows are likely to improve post FY20, but “the ratings may be downgraded if we believe Tata Motor’s FCF is not likely to improve in line with our expectations”.
For the past year, JLR has been facing a range of issues from market cyclicality and muted near-term demand in the US, uncertainties in the UK and Europe over Brexit and taxation on diesel cars, which make up about 90% of JLR’s sales in Europe. Analysts believe that JLR is unlikely to gain any further marketshare in the premium car market as its volume growth driven by filling portfolio gaps is largely done.
While JLR has a strong presence in the sport utility vehicle space, it has not made much inroad into the premium sedan market. China auto market data shows that JLR has lost its fourth place in China’s premium car market to Cadillac in CY17 and the diesel headwinds in the UK and EU are expected to continue over 6-12 months.
JLR had reported its worst Ebitda margins at 12.2% in the January-March quarter, which further fell to 6.2% during the April-June quarter.
However, analysts have maintained that improving India business continues to offer some downside support. Fitch also recognises this as it has said, “We also expect Tata Motors’ Indian business to benefit from volume growth and its strategy to reduce the number of passenger-vehicle platforms, which will support margins despite intense competition.”
“While the domestic business is improving, deterioration in JLR’s performance is likely to result in re-leveraging of Tata Motors’ balance sheet and remain a negative for its share price performance. We now expect JLR to be in a £1-billion net debt position by FY21 versus marginal net cash previously. Both the demand environment and JLR’s performance remain weak. JLR’s profitability is already at low levels and any further deterioration could lead to significant expansion in negative FCF,” analysts at UBS had noted in their report on Tata Motors.
Fitch has said that a gradual improvement in Tata Motors’ profitability that has weakened in the previous few years due to weaker profitability at JLR should help free cash flow turn positive in FY21 and curb deterioration in consolidated leverage.
By- Kritika Arora