The upgrade reflects the sustained improvement in TML's Indian automotive business over the last two years, supported by growing commercial vehicle volumes, successful new product launches in the passenger vehicle segment, as well as the management's renewed focus on meeting medium-term capital needs in its Indian operations via internally generated funds. We expect TML will continue to grow its India business and capture more market share over the medium-term. TML's rating also reflects its 100% subsidiary Jaguar Land Rover Automotive plc's (JLR, BB+/Stable) strong credit profile. JLR's EBITDA accounted for close to 85% of TML's consolidated EBITDA in the fiscal year ended on 31 March 2016 (FY16).
KEY RATING DRIVERS
Recovering Indian Operation: TML's renewed focus on passenger vehicles in the last two years has translated into successful launches in the segment. For example, the launch of the Tata Tiago in April 2016 drove double-digit volume growth in TML's passenger-vehicle segment for 9MFY17. TML's commercial-vehicle division's reported more muted volume growth of about 1% over the same period (FY16: 3%) as the Indian government's demonetisation of large notes at the end of 2016 took a toll on demand. We expect demand for commercial vehicles to improve in the next 12-18 months supported by improving economic activity. TML's Medium & Heavy Commercial Vehicle business has historically been a strong performer, and boasts a domestic market share of more than 50%.
Strong Growth in JLR: JLR reported strong volume growth of 17% yoy in 9MFY17, underpinned by strong contribution from the new Jaguar F-PACE, which offset the decline in the Land Rover Discovery and discontinuation of the Land Rover Defender over the same period. We expect JLR's Land Rover products - mainly luxury SUVs - to continue to benefit from robust demand in both developed and developing markets. JLR's launch of the new Jaguar XE and F-PACE fill in important gaps in JLR's product portfolio. JLR's strategy to target high-end customers with premium products resulted in higher EBITDA margin than its rating peers, who have a higher mix of mass-market offerings.
High Capex, Strong Financials: We expect TML to invest around GBP3.2 billion in JLR in FY17 to fund capacity expansion, engine manufacturing, vehicle architecture and new technologies to meet carbon emission requirements. The investments include a new manufacturing facility for JLR in Slovakia with an initial capacity of 150,000 units that is targeted for completion by 2018. These are likely to contribute to negative FCF in FY17, despite improving cash flows from operations. TML will also have about INR40 billion of annual capex for its Indian business, mainly for new launches of passenger vehicles. We expect TML's financial profile to remain strong over the medium term in spite of the high capex, supported by improving operating cash flows and the INR74.3 billion rights issue in FY16. We expect TML's leverage (net adjusted debt/EBITDAR) to remain around 1.0x over the medium term (FY16: 0.5x; FY15: 0.8x).
Strategic Importance to TSOL: TML's rating continues to benefit from a one notch uplift on account of the moderate linkages with its stronger shareholder Tata Sons Limited (TSOL), as defined in Fitch's Parent and Subsidiary Rating Linkage criteria. Fitch believes TSOL is likely to continue to extend support TML, if required, given the latter's strategic importance to the Tata group, and the reputational risk arising from the shared Tata brand. For example, TSOL subscribed in full to its share of TML's INR74.3 billion rights issue in FY16, and has provided financial support to TML in the past. Any weakening of linkages between the group and TML, or deterioration in the group's ability to provide support is likely to affect the ratings negatively.
DERIVATION SUMMARY
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TML's standalone rating of 'BB' is well-positioned relative to peers in each major metric. TML's standalone rating is one-notch lower than that of Peugeot S.A. (BB+/Stable). TML has a more premium product offering, through JLR, for which demand has generally been less cyclical compared with those of competitors offering mass-market products, such as Peugeot. This is counterbalanced by Peugeot's considerably larger operating scale and its stronger financial profile. TML's premium product offering versus that of Fiat Chrysler Automobiles N.V. (BB-/Positive) counterbalances its smaller operating scale, resulting in a higher standalone rating for TML.
We assess TML's linkages with its stronger shareholder TSOL to be moderate as defined in our criteria, driven by TML's strategic importance to TSOL, which is evident in the tangible support that TSOL has extended through equity injections. Consequently, we apply a one notch uplift to TML's standalone profile.
KEY ASSUMPTIONS
Fitch's key assumptions within our rating case for the issuer include:
- JLR continues to report volume growth of about 7%-8% over FY17-FY20 and EBITDA margin stabilises at around 14% due to increasing economies of scale as volumes grow, and a focus on in-house R&D and key components procurement.
-India operations to see sustained volume growth, but EBITDA margin to remain at around 3%-4% because of intense competition in passenger vehicles, and rising raw material and marketing costs.
- Capex / revenue of 12%-14% in FY17 and FY18
- Maximum annual dividend payment estimated at INR7.0 billion for FY17-FY20
RATING SENSITIVITIES
Future Developments That May, Individually or Collectively, Lead to Positive Rating Action
- We do not expect any positive rating action in the medium term as it takes time for the group to increase scale to a level that is similar with its global peers. Positive rating action may result if the TML group materially increases the volume and breadth of its products, while maintaining profitability and a strong financial profile.
Future Developments That May, Individually or Collectively, Lead to Negative Rating Action
-A weakening of linkages between the Tata Group and TML
-Consolidated net adjusted debt /EBITDAR (excluding TML's auto financing subsidiary Tata Motors Finance Limited) exceeding 1.5x on a long-term basis due to weaker sales or profitability (either at TML or JLR ), or due to higher than expected debt-funded investments
Liquidity
Healthy Liquidity: TML's readily available cash balance of INR505.2 billion at 31 March 2016 and undrawn committed banking facilities of INR339.4 billion were adequate to meet INR171.9 billion of debt maturing in FY17 and FY18. We expect available liquidity to comfortably cover projected negative FCF of around INR74 billion in FY17.
JLR had cash and financial deposits of GBP3.8 billion and undrawn committed bank lines of GBP1.9 billion at end-2016.
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