Standard & Poor's Ratings Services said today that it had raised its long-term corporate credit rating on India-based automaker Tata Motors Ltd. to 'BB' from 'BB-'. The outlook is positive. At the same time, we raised the issue ratings on the company's senior unsecured notes to 'BB' from 'BB-'.
We upgraded Tata Motors because we believe the company's competitive position and cash flow stability have improved. We assess the company's business risk
profile as "fair". Tata Motors' "significant" financial risk profile reflects our expectation that the company's ratio of consolidated debt to EBITDA will be about 2.0x-2.5x in 2013. Our view is based on the improved operating performance of Jaguar Land Rover PLC (JLR; BB-/Positive/--), which is Tata Motors' fully owned U.K. subsidiary. JLR, which accounted for about 60% of Tata Motors' consolidated revenues and two-thirds of its EBITDA in the fiscal year ended March 31, 2012, outperformed our expectations. We expect JLR to sustain the improvement in its operating performance.
"Tata Motors' dominant position in the growing Indian commercial vehicle market and JLR's improving competitive position support the company's business
risk profile," said Standard & Poor's credit analyst Abhishek Dangra.
JLR's business risk profile improved to "fair" from "weak". The improvement is attributable to: (1) healthy volume growth, particularly in emerging markets; (2) strong demand for the Land Rover brand; (3) and the launch of Evoque, which we expect will be the best-selling model for JLR in 2013. However, we believe JLR still faces a challenge in repositioning its Jaguar brand in the technologically advanced and competitive luxury car market. We also view the intense competition and weaker competitive position of Tata Motors' Indian passenger vehicle segment as a weakness.
Tata Motors' liquidity is "adequate", as defined in our criteria. We expect the company's ratio of liquidity sources to liquidity uses to be well above 1.2x in the next 12-24 months.
"The positive outlook reflects our expectation that Tata Motors will sustain its operating performance and maintain its debt protection measures, despite an increase in engineering and product development expenditure at JLR," said Dangra.
We may upgrade Tata Motors if: (1) JLR's business risk profile continues to improve, including a successful positioning of Jaguar; or (2) Tata Motors funds its increased capital development expenditure largely through internal sources, such that its ratio of consolidated debt to EBITDA falls below 2.5x on a sustained basis.
We may revise the outlook to stable if we expect Tata Motors' ratio of consolidated debt to EBITDA at more than 3x over a prolonged period due to weaker-than-expected operating performance of JLR or higher-than-expected capital expenditure.