Fitch places Tata Motors on Rating Watch Negative over Brexit risks for JLR

COIMBATORE: Fitch Ratings has placed Tata Motors Limited's (TML) Long-Term Issuer Default Rating (IDR) of 'BB' on Rating Watch Negative (RWN) list to reflect the increasing risks of a disorderly Brexit for its fully owned subsidiary Jaguar Land Rover Automotive plc.
JLR, which accounts for the majority of TML's EBITDA (earnings before interest taxes, depreciation and amortisation) generation, has a significant production bias to the UK despite a reasonable degree of geographic diversification in its sales mix.“Trade barriers and logistic issues arising upon a disorderly Brexit could have an impact on JLR's competitive positioning and could lead to significantly lower sales and profitability and higher working-capital needs,” the agency said.
“This is likely to outweigh improving operating performance in TML's India business and may lead to significantly lower cash generation and higher leverage than our rating case. The rating action follows a similar action on JLR's rating on February 4, 2019,” Fitch said.
“We aim to resolve the RWN in the next few months, when we will have more clarity over the outcome of Brexit negotiations and its impact on TML. This could lead to a downgrade by at least one notch,” it said. “Production imbalance in the JLR business exposes TML's credit profile to a no-deal Brexit scenario, whose likelihood has risen over the past few weeks,” the agency said.
JLR sells about 20% of its vehicles in both continental Europe and the US but manufactures them quasi-exclusively in the UK. “This exposes it to increased tariffs and supply-chain disruptions from a disorderly Brexit, which could undermine its competitive positioning and affect cash generation. JLR's efforts to diversify its production base will ease the imbalance in the medium term but vulnerabilities remain high in the short-term,” Fitch stated.
“The JLR business also faces risks from a fluid global tariff situation, its weakening competitive positioning in China, and the impact of tightening emission regulations on its product portfolio which is focused heavily on diesel,” the agency said. TML's India business has continued to grow in both the commercial and passenger vehicle segments.
Sales volume rose by 31% year-on-year (y-o-y) in medium and heavy commercial vehicles and by 22% in light commercial vehicles during the nine months ended December 31, 2018 (9MFY19), on the back of continued GDP growth and infrastructure spending.