Moody’s on Wednesday revised its outlook on Tata Motors (TML) from stable to negative, given the continuing weak performance of its passenger vehicles subsidiary Jaguar Land Rover (JLR) and the firm’s two consecutive quarters of losses.
A day earlier, Moody’s had downgraded JLR to ‘Ba3 negative’ from ‘Ba2 stable’ owing to deteriorating credit and operating profiles. While retaining its ‘Ba2’ rating for the Indian car manufacturer, the agency noted that an upgrade is unlikely in the next 12-18 months.
Given the company’s non-JLR operations now account for half the company’s consolidated Ebitda, Moody’s estimates TML’s consolidated leverage was around 4.3x, at the end of September, in contrast to JLR’s adjusted debt/Ebitda of 4.8x. At the end of March 2018, Tata Motors had consolidated total borrowings of Rs 88,950 crore and the company’s interest bill in 2017-18 was Rs 4,681 crore.
While JLR has chalked out cost-cutting and efficiency plans which could potentially result in savings of £2.5 billion in the next 18 months, Moody’s cautions that the impact of the plan will not kick in the second half of the current financial year. The company has reduced its annual capex guidance to £4 billion in FY2019E and FY2020E from £4.5 billion annually earlier.
Moody’s wrote that the negative outlook reflects its view that JLR may not able to achieve the efficiency targets and the company should rather be concentrating on electric vehicles.
Cash flows of JLR in Q2FY19 were a negative £624 million, owing to an increase in working capital requirements; this was lower than the negative of £1,674 million in Q1FY19.
The car and truck maker’s deteriorating performance has been reflected in its stock price. The stock has hugely under-performed over the past one year, losing a whopping 57% compared with a gain of 6.7%. On Wednesday, shares of Tata Motors on Wednesday lost 1.67% to close at `176.80 apiece on the BSE.
Tata Motors reported a consolidated loss of `1,048 crore in the September quarter and `1,902 crore in the June quarter. JLR has been facing multiple headwinds, including Brexit, slowing sales in China which fell 44% in the September quarter due to dealership issue and tepid diesel car sales in Europe and the UK.
JLR’s chief executive officer Ralf Speth remarked earlier that the company is unable to do much as various political developments are affecting business at the same time.
While the Tata Motors management has indicated after the September quarter that it is working to cut dealer stock from 2.5 months to around 1 month in China, analysts had said the profitability of the China venture is unlikely to reach its past peak anytime soon.
In a post-September quarter results report, analysts at Jefferies had noted that margins are likely to remain weak in the third quarter as well and may improve in the fourth quarter. The company reported an Ebitda margin was 9.1% in Q2FY19, down 270 bps y-o-y.
Post the June quarter, the management had indicated other reasons for weak results, including lower profits from China facing trade issues and forex losses. Jefferies had pointed out “many of these are one-off in nature, in the current weak macro environment, headwinds to profits for many different reasons seem to be a recurring feature”.
The company incurred quarterly loss in the September quarter despite it earning `109 crore from Indian operations and remaining the market leader in the commercial vehicle segment wherein it commands a 46% market share.
Tata Motors improved its share in the passenger vehicle segment to 6.2% in the first half of the current financial year.
While Tata Motors’ standalone vehicle sales improved 47% in the first half of the current financial year compared with the same period last year, JLR sales shrank 9% during the period. However, the enormity of losses arising out of JLR — with operations in the US, Russia and Brazil as well —is likely to dwarf the gains from the Indian market. The UK arm’s retail volumes fell 4.1% and wholesale volume 10.1% year-on-year in the first half of FY19.
Moody’s noted that JLR’s weak operating performance is likely to continue for at least 12-18 months, weighing on Tata Motors’ earnings and, in turn, its rating trajectory. While a ‘Ba2’ rating implies substantial credit risk, ‘Ba3’ is even a notch below.
JLR, which Tata Motors acquired in 2008, is the bulk earner and contributes more than 70% to the revenues of the Indian car manufacturer.