| Tata Motors Limited | ||||||||||
| Ratings Reaffirmed | ||||||||||
| Rating Action | ||||||||||
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| Note: None of the Directors on CRISIL Ratings Limited’s Board are members of rating committee and thus do not participate in discussion or assignment of any ratings. The Board of Directors also does not discuss any ratings at its meetings. | ||||||||||
| 1 crore = 10 million | ||||||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA-/Stable/CRISIL A1+’ ratings on the bank facilities and debt instruments Tata Motors Limited (TML). CRISIL Ratings has withdrawn its rating on Rs.1500 crore proposed bank loan facilities at the company’s request. This is in line with CRISIL Ratings’ policy on withdrawal of bank loan ratings.
The ratings continue to reflect the strong legacy of Jaguar Land Rover (JLR) in the global luxury automotive (auto) market, robust market position of TML in the domestic commercial vehicle (CV) segment, improving position in the passenger vehicle (PV) segment, and strong financial support from the Tata group and specifically, Tata Sons, given its strategic importance, thereby lending substantial financial flexibility. These strengths are partially offset by intense competition in the global luxury auto sector and inherent cyclicality in the domestic CV and PV businesses.
For the first half of fiscal 2023, the wholesale volume (excluding China JV) of JLR remained intact on-year, but below earlier expectations. First quarter of fiscal 2023 volume contracted steeply by 15% against the same period of the previous fiscal owing to higher-than-expected semiconductor shortages and slower than expected transition of production capacity towards newer launches. The volumes picked up in the second quarter with a healthy demand for the Range Rover series, ramp up of production and allocation of chips to higher margin products. Overall, JLR’s volume growth are expected to remain muted at 5-10% on-year in fiscal 2023 against the earlier expectations of much stronger volume growth on account of challenges attributable to supply of semiconductors. The demand for its products, however, remains strong and is evidenced by a growing order book that stands at 2,15,000 as on 31 December 2022
Performance remained strong on the domestic front, with overall volumes up by 66% on-year driven by low base, continued strong performance in PV segment and cyclical recovery in the CV segment; although steep commodity input price increases have limited margin expansion. As commodity prices have started to moderate, the benefit of the same is expected to reflect in improved margins in the second half of the year.
During fiscal 2022, the company hived off the PV unit into a separate subsidiary, Tata Motors Passenger Vehicles Ltd, after receipt of approval from the National Company Law Tribunal. Furthermore, the passenger electric mobility business was hived off into a separate subsidiary, Tata Passenger Electric Mobility Ltd (TPEML). TML has secured investment of USD 1 billion from TPG Rise Climate in TPEML at an enterprise valuation of up to USD 9.1 billion. The funds will be utilised towards product, platform, design and infrastructure creation. Further, TPEML has acquired Ford India Pvt Ltd’s manufacturing plant in Sanand, Gujarat for a consideration of Rs. 725 crore which will increase its overall capacity by 300,000 units per annum, scalable to 400,000 units per annum.
Overall, consolidated EBITDA (earnings before interest, taxes, depreciation, and amortisation) margin is expected to remain stable in fiscal 2023 against fiscal 2022 as the impact of lower JLR volumes and commodity inflation, is offset by favourable product mix, healthy domestic volumes and continued cost control. Free cash flow (FCF) post meeting capital expenditure (capex) is expected to breakeven in fiscal 2023. As per CRISIL Ratings’ estimates, adjusted net debt to EBITDA is expected to remain around 2 times in fiscal 2023 against 2.7 times for fiscal 2022.
Demand for JLR vehicles remains strong with retail order book of over 2.15 lakh units and inventory at a record low. Domestic CV and PV should continue to post healthy growth. Improved operating leverage, better product mix and easing commodity inflation may lead to improvement in consolidated EBITDA margin over the medium term and consequently, moderate the adjusted net debt to EBITDA to below 2 times. Semiconductor supply, though improving, remains a key risk and monitorable.
The company had announced its commitment to achieve near net auto debt zero by fiscal 2024 through better operating leverage driven by improved volumes and higher margin led FCF at JLR and supported by funds raised for growth or for strategic divestments. While achieving this may be challenging, CRISIL Ratings expects debt to reduce progressively with higher free cash flow generation. At JLR, the company plans to optimise platform architectures and lower capex intensity (~GBP 2.5 billion per annum on a sustainable basis). However, high competitive intensity and risks related to technology and regulations and the company’s progress against the same would remain closely monitored. |
Analytical Approach CRISIL Ratings has combined the business risk profiles of TML and its subsidiaries (included in Annexure - list of entities consolidated), including JLR and its joint venture, Chery Jaguar Land Rover Automotive Co Ltd (CJLR), in proportion to its shareholding. CRISIL Ratings has applied its group notch-up framework to factor in the extent of support available from the Tata group.
With regard to Tata Motors Finance Ltd (TMFL; ‘CRISIL AA-/CRISIL A/Stable/CRISIL A1+’), which is a captive finance subsidiary, CRISIL Ratings has used the capital allocation approach wherein the capital required for maintaining the credit risk profile is factored. To arrive at the adjusted net debt, CRISIL Ratings reduced the surplus cash of TML and debt of TMFL from the consolidated debt of TML and has also added acceptances to the debt. Surplus cash is defined as cash & equivalents exceeding Rs 15,000 crore, which may be required for daily operations of JLR and domestic business.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation |
Key Rating Drivers & Detailed Description Strengths: Strong legacy in the global luxury auto segment Jaguar and Land Rover are iconic brands with a rich heritage in the premium luxury segment. JLR’s product-development capabilities enabled successful launches and expansion into new segments, thus enhancing its product portfolio. New product launches in Land Rover segment such as Defender and refreshed version of Range Rover and Range Rover Sport have gained good traction with the Land Rover brand contributing around 80% to the overall sales of JLR in the first half of fiscal 2023. While Jaguar has been a drag on profitability, the company is looking to modernise the brand, scale-down loss-making sedans and make it all-electric from 2025. With frequent refreshes and new product launches in the Land Rover segment, TML will continue to maintain its niche position in the global auto market.
Dominant market position in domestic CV segment and improving market position in domestic PV TML is the dominant player in the domestic CV segment, with a company-reported market share of ~55% in the medium & heavy CVs (MHCVs), ~49% in intermediate light CVs (ILCV), ~39% in small CVs (SCV) and ~39% in buses in fiscal 2022. Although TML’s overall market share particularly in SCVs and buses declined over the years, it is likely to stabilise with the management’s focus on improving product portfolio and further enhancing distribution reach. Its strong distribution presence along with service touchpoints provides it with a competitive edge. Its captive finance subsidiary arm -- TMFL -- also aids its strong market position. For the first half of fiscal 2023, CV volume grew by over 45% on-year, driven by healthy demand and new product launches.
On the PV front, the company has seen significant turnaround in operations, led by new product launches, product re-engineering and footprint expansion leading to increased reliability and acceptance amongst customers. As of September 2022, market share grew to ~14% from a meagre 4.2% in fiscal 2020; which led to EBITDA margin rising to 5.7% for the first half of fiscal 2023 from a negative -9.4% in fiscal 2020, despite high commodity prices. Medium-term outlook remains favourable with healthy growth in volumes, which will help improve margin to expand further.
Strong financial support from the Tata group TML is one of the flagship companies of the Tata group. The group chairman, Mr N Chandrasekaran, also chairs its board along with JLR. Given its strategic importance, it derives strong financial support from the Tata group through its holding company, Tata Sons Ltd. This is reflected in several instances of support over the years, including the Rs 6,500 crore infusion in fiscals 2020 and 2021, which also increased the promoter stake to 45.82% in January 2021 from 38.37% in March 2019. Being a part of the Tata group, the company derives significant financial flexibility and access to low-cost funds from banks and capital markets.
Weaknesses: Exposure to intense competition in the global luxury car segment and large working capital requirement JLR is exposed to stiff competition from bigger and established brands such as BMW, Daimler and Volkswagen. With its niche presence in premium SUVs (sport utility vehicles), JLR has relatively low market share in the world luxury car segment. Due to these factors, profitability is weak as compared with peers. Moreover, the auto business requires large capex, with successive product launches and investment in technology. The global auto industry is rapidly evolving with higher regulatory focus on emission norms and transition to electric vehicles. Further, consumer preference is shifting towards new technologies such as connected cars and autonomous driving. This will require substantial investment in new technologies, regulatory compliance and electrification drive. Led by rejigging of architecture and platforms, the company has rationalised the yearly capital investments requirement to around GBP 2.5 billion over the medium term.
Susceptibility to inherent cyclicality in the domestic CV and PV business The domestic CV business is inherently cyclical, with strong linkage to economic activity. Multiple events such as the increased axle load norms, the Covid-19 pandemic and transition to BS-VI led to a sharp decline in the industry volumes for fiscals 2020 and 2021, reaching a decadal low. Increased infra outlay will support demand for M&HCVs and ILCVs from key end-user sectors such as steel, cement, construction and increased penetration of e-commerce activities will create demand for SCVs. Nevertheless, volumes are still expected to trail the levels seen in fiscal 2018/19. Further, the company is looking to mitigate the cyclicality through increasing the share of exports, scaling up the used vehicle business as well as increase spare and services penetration.
The PV also remains exposed to economic activity. Although the company has gained healthy market share in the past 2 years, it remains susceptible to competition from bigger players and the macro environment. |
Liquidity: Strong As per CRISIL estimates, annual cash accrual is projected at Rs 20,000-25,000 crore over the medium term, adequate to meet yearly debt repayment of Rs 16,000-20,000 crore. As of September 2022, consolidated cash and equivalents stood at around Rs 50,000 crore besides undrawn bank lines of about Rs 20,000 crore. Further, fund-based bank lines remain moderately utilised. Capex including research & development expenses is expected at around 25,000-30,000 crore each for fiscals 2023 and 2024 and is expected to be funded through internal accrual, cash balance and external debt. Additionally, liquidity remains supported by strong financial flexibility, being a part of the Tata group.
ESG Profile CRISIL Ratings believes that TML’s Environment, Social, and Governance (ESG) profile supports its credit risk profile.
The auto sector has a significant impact on the environment because of the high greenhouse gas (GHG) emissions of its core operations as well as products. The sector also has a significant social impact because of its large workforce across its own operations and value chain partners and focus on innovation and product development. TML has continuously focused on mitigating its environmental and social risks.
TML’s key ESG highlights:
There is growing importance of ESG among investors and lenders. TML’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given its high share of market borrowings in its overall debt and access to both domestic and foreign capital markets. |
Outlook: Stable TML should continue to benefit from its steady volume growth, improved mix and cost-control measures. Further, moderate capex should support a stable credit risk profile |
Rating Sensitivity Factors Upward Factors
Downward Factors
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About the Company TML is a wholly integrated auto company, manufacturing passenger cars, sports-utility vehicles, and CVs. In June 2008, it acquired JLR, which specialises in manufacturing premium cars, and Land Rover, that specializes in premium sports utility vehicles. The PV unit was hived off into a separate subsidiary effective January 2022 and the passenger electric mobility business is housed in a separate subsidiary, TPEML. |
Key Financial Indicators (Consolidated - adjusted by CRISIL Ratings)*
*excluding CJLR |
Any other information: Not applicable |
Note on complexity levels of the rated instrument: |
Annexure - Details of Instrument(s)
*Fund based facility of State bank of India is interchangeable with non-fund based facility. |
Annexure - List of Entities Consolidated^
^As per annual report of the company for fiscal 2022 |
| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Criteria Details
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