Moody's upgrades outlook on Tata Motors to 'Stable' on sustained recovery

Recovery is from the trough hit Q1 of FY21, is expected to sustain over next 12-18 months, while the firm's credit metrics strengthen as well

Rating agency Moodys has upgraded the outlook on Tata Motors Ltd (TML) from “negative” to “stable” due to continued recovery in the firm's consolidated revenue and profitability.

The recovery is from the trough during the pandemic in the first quarter of the fiscal year ended March 2021. It is expected to sustain over the next 12-18 months, along with strengthening of TML's credit metrics, according to Moody's.

At the same time, Moody's has affirmed TML's B1 corporate family rating (CFR) and B1 senior unsecured ratings.

Today's action follows Moody's affirmation and change in outlook to stable from negative on the B1 ratings of TML's wholly-owned UK subsidiary, Jaguar Land Rover Automotive Plc (JLR) earlier this week. JLR constitutes half of TML's global unit sales, but accounts for almost 80 per cent of TML's consolidated revenues and adjusted EBITDA.

"Our adjusted free cash flows for TML will likely stay negative with its continuous product development and capital expenditure, although the improving profitability and leverage support our view that the imminent risk of a downgrade has now been averted," said Kaustubh Chaubal, Vice President and Senior Credit Officer, Moody's. He is also the lead Analyst on Tata Motors.

Moody's expects JLR to deliver credit metrics appropriate for its B1 rating during the fiscal year ending March 2021 (fiscal 2021) and to sustain the improving trajectory. JLR's restructuring efforts and its solid growth in China, as well as the recovery in other key markets such as Europe and North America over the coming quarters, will improve its profits and leverage, believes Moody’s.

JLR's restructuring efforts and its solid growth in China, as well as the recovery in other key markets such as Europe and North America over the coming quarters, will improve its profits and leverage.

Given these large contributions, JLR's improving credit metrics have a direct and immediate impact on TML's consolidated metrics and influence its credit profile.

Meanwhile, TML's operations other than JLR -- TML India, which comprises commercial vehicles (CVs) and passenger vehicles (PVs) in India -- will be challenged during the current quarter because of lower unit sales amid the severe second wave of Covid cases causing localised lockdowns in the country. As a result, Moody's revised India real inflation-adjusted GDP growth forecast down to 9.3% for fiscal 2022 from 13.7 per cent.

Moody's said the impact of the second wave is expected to be less severe on the economy given lockdowns are more localized, as opposed to a nationwide lockdown at the start of the pandemic in 2020. As of now, Moody's expects the negative impact on India's economy to be limited to the current quarter.

Moody's forecasts for TML India assume that the company achieves April 2021 unit sales for the first half of fiscal 2022, before climbing to March levels for the rest of fiscal 2022.