"As proceeds from the recently concluded rights issue of Rs. 75 bn will be used towards retiring INR 40 billion of debt and the balance to fund Tata Motors' capital expenditure for its India business and towards building liquidity reserves for its other small businesses, we anticipate minimal incremental debt for the company's non-JLR businesses," says Kaustubh Chaubal, a Moody's Vice President and Senior Analyst.
Moody's Investors Service says that Tata Motors Limited's (Ba2 stable) consolidated results for the fiscal year ended 31 March 2015 (FY2015) were higher than its expectations, mainly on account of the better operating performance of Jaguar Land Rover Automotive Plc (JLR, Ba2 positive).
"As proceeds from the recently concluded rights issue of Rs. 75 bn will be used towards retiring INR 40 billion of debt and the balance to fund Tata Motors' capital expenditure for its India business and towards building liquidity reserves for its other small businesses, we anticipate minimal incremental debt for the company's non-JLR businesses," says Kaustubh Chaubal, a Moody's Vice President and Senior Analyst.
"However, we expect JLR's debt to rise to partly fund its announced capital expenditure of GBP3.6 billion-GBP3.8 billion, resulting in consolidated leverage of 2.3x-2.6x over the next 12 months," adds Chaubal.
Chaubal was speaking on the release of a Moody's issuer comment, "India - Tata Motors Limited: Rights Issue and Improving Commercial Vehicles Sales in India Will Limit Tata Motors' Drag on JLR in FY2016". The report was authored by Chaubal and Vincent Tordo, a Moody's Associate Analyst.
Looking ahead, Moody's expects Tata Motors' standalone leverage to improve in March 2016, mainly on account of lower debt and a substantial turnaround in its standalone operations.
Moody's further expects that the ramp-up of the new Jaguar XE, which entered the market in March 2015; the launch of the new lightweight Jaguar XF, the 2016 model year Evoque -- including a convertible variant, the F-PACE -- and the full-year contribution from Discovery Sport will support JLR's volume growth over the next 12-18 months.
However, weaker demand from China and mixed demand conditions in Europe, markets that account for almost 25% and 19% respectively of JLR's volumes, are expected to weigh on performance in FY2016.
Sales in China were affected most in January-March, down 20% year-on-year. Furthermore, a change in model mix and launch costs associated with the new products will likely exert pressure on JLR's margins. In India, demand for medium and heavy commercial vehicles (M&HCV) will continue to drive the recovery for Tata Motors India.
Furthermore, new product launches from the Prima LX and Ultra range, and bus orders under the Jawaharlal Nehru National Urban Renewal Mission -- a city modernization scheme launched by the Indian government -- are expected to provide the fillip for M&HCV growth over the next 12-18 months.
Looking back over FY2015, Moody's notes that Tata Motors' consolidated net sales of INR2,607 billion and reported EBITDA of INR421 billion were both up 13% from FY2014. EBITDA margins were flat at 16% and consolidated leverage at March 2015 increased marginally to 1.71x from 1.59x last year, due to increased borrowings.
Tata Motors also reported standalone EBITDA of INR3.0 billion for January-March, positive for the first time in the last six quarters, mainly due to an uptick in replacement demand for M&HCVs. A further pickup in M&HCVs and recovery in the light commercial vehicles segment in H2 FY2016 should drive improvement in standalone EBITDA.
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