Moody’s retains negative outlook on Tata Motors

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Mumbai | Published: November 13, 2019 3:57:34 AM

Moody's on Tuesday assigned a rating of Ba3 negative to Tata Motors' proposed issuance of senior unsecured debt instruments.

Tata Sons’ fund infusion plan should support the balance sheet given rising leverage, according to analysts at Jefferies.

Moody’s on Tuesday assigned a rating of Ba3 negative to Tata Motors’ proposed issuance of senior unsecured debt instruments. In October, the board had approved a fund-raise of Rs. 3,500 crore through external commercial borrowings for refinancing of existing debt. The credit rating agency has also maintained a negative outlook on India’s largest commercial vehicle manufacturer.

However, analysts believe Tata Sons’ fund infusion in Tata Motors is credit positive.

“The equity injection also reflects Tata Sons’ continued support, and will somewhat reduce the pressure on Tata Motors’ balance sheet stemming from the weak operating performance of its India business, even as JLR delivers some improvement,” said Kaustubh Chaubal, vice president and senior credit officer, Moody’s.
The board has approved equity infusion of Rs. 6,500 crore from parent Tata Sons via preferential allotment of ordinary shares and warrants.

Tata Sons’ fund infusion plan should support the balance sheet given rising leverage, according to analysts at Jefferies.

So far, weak JLR (Jaguar and Land Rover) sales have been the primary factor behind the slide in Tata Motors’ credit profile. Declining sales in China had led to Tata Motors posting its biggest loss of Rs. 3,679 crore in the quarter ended June. JLR’s performance in China improved in October with the fourth consecutive month of double-digit sales growth. JLR has been focused on cutting capex and cost, benefits of which have started to reflect now, according to Motilal Oswal Institutional Equities.

The luxury-car subsidiary helped Tata Motors to post the highest operating margin in four years at 12.4% for the quarter-ended September as better JLR sales cushioned the impact of the slump in domestic passenger and commercial vehicle sales. Losses narrowed to Rs. 188 crore in Q2FY20.

“While we expected losses in the standalone business given the steep 45% y-o-y decline in overall volumes and 59% decline in MHCVs, losses were higher than expected partly due to Rs. 230 crore write-off related to PV business in other expenses. However, even adjusted for this gross margin was sharply lower which management attributed partly to weaker mix. We suspect high level of discounts may have also hurt,” analysts at Jefferies wrote.

Passenger vehicle retail sales were 36% higher y-o-y than wholesale in the festive month of October. “October retail sales were the highest in this fiscal recording a 70% increase month-on-month,” Mayank Pareek, president, (passenger vehicles), Tata Motors said. Nonetheless, analysts at Axis Capital expect discounts to remain high particularly in the PV segment over the near term.

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