Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities of Tata Motors Passenger Vehicles Ltd (TMPVL) a subsidiary of Tata Motors Ltd (TML; a part of the Tata group) at ‘CRISIL AA+/Stable/CRISIL A1+’.

 

TML has received board approval for the composite scheme of arrangement amongst TML, TML Commercial Vehicles Ltd (TMLCV), Tata Motors Passengers Vehicles Ltd (TMPVL) and their respective shareholders and filed the same with stock exchanges. Post receipt of approvals, the scheme will be filed with National Company Law Tribunal (NCLT) for the necessary approvals. Upon implementation of the scheme, the commercial vehicles (CV) business, along with all assets, liabilities and employees, will be demerged into a separate listed entity, TMLCV. As part of the demerger, TMLCV will have identical shareholding in resonance with current shareholding of TML. Consequently, TMPVL will be merged with TML, the existing listed entity, TML will be renamed as Tata Motors Passenger Vehicles Ltd and TMLCV will be renamed as Tata Motors Limited. The same is expected to be concluded in the next 10-12 months.

 

The asset ratio is anticipated to be ~60:40 around the appointed date. The specific liabilities pertaining to the CV and passenger vehicles (PV) business will be allocated to the respective Companies, whereas the unallocable liabilities shall be apportioned based on the asset ratio.

CRISIL Ratings evaluates the demerger to be credit neutral as the sharp deleveraging in the consolidated entity would continue for both the entities. The demerger does not impact the financial risk profile of both the companies.

 

The PV business risk profile will continue to be supported by rising market share of domestic PV business, improved earnings before interest, tax, depreciation and amortisation (EBITDA) margin driven by operating leverage resulting in strong free cash flow (FCF) generation in the JLR business, market leadership in electric vehicles (EV) business and the synergies in the three business segments.

 

The PV financial risk profile would be supported by expected net auto debt free by fiscal 2025 through operating leverage driven by improved volumes and higher margin led FCF at JLR resulting in low net leverage.

 

The credit profile of TML (post merger of TMPVL) will continue to benefit from the ownership of Tata Sons and being a flagship company for the Tata group. Tata group will continue to maintain existing shareholding in TML. As per management, given the strategic importance of auto business to the Tata Group, TML will continue to have significant financial flexibility and access to low-cost funds from banks and capital markets being part of the Tata Group.

 

The ratings continue to reflect the improving market position of TMPVL in the domestic passenger vehicle (PV) market and its healthy financial risk profile. They also factor in the strong financial and managerial support expected from TML, given the strategic importance of TMPVL. These strengths are partially offset by modest operating efficiency and susceptibility to intense competition and cyclicality in the automobile industry.

Analytical Approach

CRISIL Ratings has applied its parent notch-up framework to factor in the extent of distress support that TMPVL is likely to receive from TML.

Key Rating Drivers & Detailed Description

Strengths:

• Improving market position in the domestic PV market: TMPVL has gained market share over the past three years, with new product launches, product re-engineering and timely refreshes of existing models, resulting in increased reliability and acceptance among the customers. As of March 2024, it had a reported market share 13.9% (which is about 40 basis points higher in comparison to March 2023). Both utility vehicle (UV) and car segments contribute strongly, with Nexon and Punch (UVs) and Tiago and Altroz (cars) accounting for around 85% of total sales. The volume growth should remain healthy over the medium term with sustained demand and unlocking capacity.

 

• Healthy financial risk profile: TMPVL is debt-free apart from a term debt (from government of Gujarat) of Rs 223 crore. When the PV entity was subsidiarised, debt was not transferred, mainly to support the new entity in the initial stabilization phase. Further, repayment of term debt will commence from March 2033, thereby enabling the company to replenish cash and reduce reliance on external debt. With the transfer of the electric vehicle business into a separate entity, TMPVL will not be burdened by the large capital expenditure (capex) requirement. Hence, debt protection metrics will remain strong over the medium term.

 

• Strong financial and managerial support from TML: TMPVL was formed as a result of hiving off of the PV unit of TML into a separate entity. TMPVL continues to be of strategic importance to TML and will play a central role in the growth strategy of TML and receives strong support from the parent. In a demerged scenario, TMPVL will remain important to the growth strategy of PV business.

 

Weaknesses:

• Modest operational efficiency: Till fiscal 2020, the PV business was performing sub-optimally with weak EBITDA margin (negative 12.3%, 0.1% and negative 9.4% in fiscals 2018, 2019 and 2020, respectively). Low utilisation rates and the adverse product mix led to a significant cash burn. In fiscal 2021, despite the Covid induced headwinds, the margin turned positive to 2.2%, led by strong volume growth and cost rationalization measures. The margin improved further to 5.3% in fiscal 2022, 6.4% in fiscal 2023 and 6.5% in fiscal 2024 driven by strong volume growth resulting in favourable operating leverage. CRISIL Ratings expects the EBITDA margin to sustain at 6-7% over the medium term, backed by higher capacity utilisation, a favourable product mix and continued cost rationalization measures but partly offset by higher mix of EV in overall sales which has been reporting EBITDA losses.

 

• Susceptibility of profitability and market share to intense competition and cyclicality: The Indian PV market remains highly competitive, with players launching new models regularly, especially in the compact, mid-sized and UV segments. With more players vying for a share of the growing pie, competition in the domestic PV market will intensify. Nevertheless, the market is highly concentrated amongst four large players, which have over 75% of the market share. CRISIL Ratings believes the market position and operating margin of the company will hinge on its ability to consistently launch new variants and models.

 

Although TMPVL has outperformed the major players in UV segment and garnered sizeable market share, it remains vulnerable to competition and inherent cyclicality in the industry.

Liquidity: Strong

As per CRISIL Ratings’ estimates, net cash accrual of Rs 3,500-4,500 crore per fiscal in 2025 and 2026, will more than suffice to cover the yearly capex of Rs 2,500-3000 crore. TMPVL had liquidity of ~Rs. 178 crore as on 31st March 2024.  Furthermore, absence of any term debt servicing in the next few years will also bolster the cash generation ability. As of March 2024, the fund-based limits were unutilized. Need-based support from the parent enhances the liquidity position.

Outlook: Stable

TMPVL will remain strategically important to TML and hence, continue to receive strong managerial and financial support from the parent over the medium term.

Rating Sensitivity Factors

Upward Factors

• Upgrade in ratings of the parent, TML by 1 notch.

 

Downward Factors

• Downgrade in ratings of the parent, TML by 1 or more notches.
• Material decline in operating margin leading to sustained low return on capital employed and reduced strategic importance to TML.

About the Company

TMPVL was formed as a result of transfer of the PV unit of TML to a newly formed entity in fiscal 2021. It is 100% owned by TML. Manufacturing facilities are at Sanand (Gujarat) and Pune (Maharashtra).

Any other information: Not Applicable