Brexit Effect: Fitch Places Tata Motors on Negative Rating Watch Due to Risks for JLR
Fitch Ratings has placed Tata Motors Ltd (TML)'s long-term issuer default rating (IDR) of 'BB' on rating watch negative (RWN) to reflect the increasing risks of a disorderly Brexit for its fully owned subsidiary Jaguar Land Rover Automotive plc (JLR).
"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," the ratings agency says.
JLR accounts for the majority of Tata Motor's EBITDA generation and has a significant production bias to the UK despite a reasonable degree of geographic diversification in its sales mix.
Fitch says, "Production imbalance in the JLR business exposes Tata Motor's credit profile to a no-deal Brexit scenario, whose likelihood has risen over the past few weeks. 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."
According to the ratings agency, trade barriers and logistic issues arising upon a disorderly Brexit could have an impact on JLR's competitive positioning, and lead to significantly lower sales and profitability and higher working-capital needs. "This is likely to outweigh improving operating performance in Tata Motor's India business, and lead to significantly lower cash generation and higher leverage than our rating case," it added.
Fitch sees material impact of the Brexit on financial profile of Tata Motors as well. It says, "The potential impact of a disorderly Brexit on cash generation would outweigh growth in the India business, resulting in a substantially weaker consolidated financial profile for Tata Motors."
Fitch estimates that Tata Motor free cash flow (FCF) to be significantly lower over FY19 and FY20 in a "hard Brexit" scenario compared with its rating case. This, the ratings agency says, is due to a combination of lower profitability, higher working-capital needs and substantial capex, despite management's restructuring measures. "In our view, Tata Motor has only a limited flexibility to cut its capex meaningfully at JLR as it will be essential to maintain JLR's long-term positioning in view of emerging sector trends," it added.
Although the group has a comfortable liquidity, there are risks from disorderly Brexit. Tata Motors has a readily available cash balance of Rs390 billion at FY2018 (estimate) was adequate to meet Rs180 billion of debt, both excluding the financial-services business maturing in FY2019. The liquidity profile is further supported by a balanced debt-maturity profile, recent refinancing activities in JLR and undrawn committed credit facilities - including 1.9 billion pounds available to JLR (about Rs178 billion) and Rs20 billion to Tata Motors as of 30 September 2018.
Fitch expects TML's liquidity to comfortably cover a moderate level of negative FCF forecast for FY19. Nonetheless, a disorderly Brexit could lead to significantly lower profitability and working-capital build-up, which could lead to deterioration in free cash generation and put pressure on liquidity.