Tata Sons infusing USD 914 million (around Rs 6,542 crore) equity in Tata Motors is credit positive for the company but the country’s largest automobile manufacturer faces acute challenges in sluggish economic growth, weak liquidity, and tight financing norms, Moody’s Investors Service said on Tuesday.
Moody’s assigned a Ba3 rating to the proposed senior unsecured notes to be issued by Tata Motors. The rating outlook is negative, Moody’s said in a statement.
“The Ba3 ratings reflect Tata Motors Ltd’s (TML) leading market position in commercial vehicles (CVs) in India, 100 per cent ownership of the premium/luxury car manufacturer Jaguar Land Rover Automotive Plc, and ownership by Tata Sons, which results in a one-notch uplift, reflecting our expectation of continued parental support, when needed,” says Kaustubh Chaubal, a Moody’s Vice President and Senior Credit Officer.
On October 25, TML announced that it will make a preferential allotment of equity shares and convertible warrants to Tata Sons for a USD 914 million equity injection, of which USD 548 million will be paid immediately, and the balance over a period of 18 months.
Pro-forma the preferential allotment and the conversion of the warrants, Tata Sons’ shareholding in TML will increase to 46.4 per cent from the current 38.4 per cent. “We view the preferential allotment as a credit positive because TML plans to apply the proceeds towards reducing its debt,” adds Chaubal, who is also Moody’s Lead Analyst for TML.
“The equity injection also reflects Tata Sons’ continued support, and will somewhat reduce the pressure on TML’s balance sheet stemming from the weak operating performance of its India business, even as JLR delivers some improvement.”
JLR continues to make progress on its cost savings and efficiency plan with the aim to achieve GBP1.0 billion in cost savings by March 2020, having delivered GBP0.5 billion up to September 2019. In addition, JLR has achieved GBP1.5 billion of its GBP1.7 billion target on capital expenditure and working capital improvements as of September 2019.
Looking ahead, Moody’s expects JLR’s adjusted debt/EBITDA to improve from 10.6x at March 2019 to 6.0x over the next 12 months.