Tata Motors demerger: Moody's affirms Ba3 rating; positive outlook

Two days after Tata Motors (TML) unveiled a plan to demerge its businesses into two separate listed entities, Moody's Investors Service affirmed ‘Ba3’ corporate family rating to the auto major. The global rating agency has also affirmed TML’s Ba3 senior unsecured instrument ratings and maintained the positive outlook on all ratings.

“The positive outlook reflects that the upgrade momentum on TML's ratings should continue with or without the proposed demerger,” Moody’s says in a release issued on March 6. The rating agency expects all of TML's businesses to continue to deliver on their strategic growth priorities while maintaining a balanced financial policy that focuses on achieving net-zero automotive debt by March 2025.

The rating affirmation follows Tata Motors’ announcement earlier this week that its board of directors have agreed for the demerger of its operations into two separate companies for commercial vehicles (CVs) and passenger vehicles (PVs), respectively, subject to shareholder and regulatory approvals. The company plans to list commercial vehicles business and its related investments as one entity and the passenger vehicles businesses including electric vehicles (EV), British arm Jaguar Land Rover (JLR), and its related investments as another entity. The demerger is likely to be completed within the next 12-15 months.

"While the demerger would result in TML's remaining operations comprising only CVs, the company's strong foothold with about 40% share in India's growing CV industry and the business' demonstrated ability in generating large free cash flow through industry cycles will support its credit profile," says Kaustubh Chaubal a Moody's Senior Vice President.

"With unit sales of less than 0.5 million, revenues of around $9 billion and EBITA margin at about 8%, TML's CV operations will likely generate ample free cash flow with credit metrics substantially strong for a Ba3 CFR," adds Chaubal who is also Moody's lead analyst on TML.

As part of the demerger, all TML shareholders will have identical shareholdings in both listed companies - the PV subsidiary (PV-CO) and the CV subsidiary (CV-CO). The proposed structure would enable optimising synergies across TML's PV and EV businesses in India and JLR, the report notes.

Though exact details of the potential demerger are yet to be announced, Moody's believes that CV-CO is likely to generate substantial earnings and cash flow to comfortably service its debt obligations.

“Moreover, even if the entire debt at TML's Indian operations and at intermediate holding company TML Holdings Limited were to be serviced out of CV-CO's cash flows, its credit profile would remain sufficiently strong to support the positive outlook,” the report highlights.

While JLR accounted for around 70% of TML's existing revenue and EBITDA for the year ended March 31, 2023 (fiscal 2023), high capital spending and execution risks associated with, in particular JLR's electrification strategy and transformation, are some of the constraints for TML's existing credit profile, says Moody’s. As such, even though TML's scale would reduce after the potential demerger, the remaining business' relatively limited product development and capital expenditure should support its credit profile, it adds.

As of December 2023, Tata Motors’ consolidated cash, cash equivalents and short-term investments stood at around $6.4 billion and Moody's expects cash flow from operations (CFO) totaling $8.4 billion over the 18 months ending June 2025, will be more than sufficient to meet cash obligations aggregating $8.0 billion. These cash obligations comprise $3.9 billion of debt repayments (including short-term debt), and Moody's estimated capital expenditure and dividend payments of around $3.8 billion and $343 million, respectively.

“An entirely undrawn 1.5 billion pounds revolving credit facility (RCF) maturing in 2026 provides JLR cushion to tide through seasonal variations in its CFO, although TML India would need to rely on its short-term 364-day working capital facilities to tide over similar temporary mismatches,” the report says.

As per the report, given the prospects for the CV industry are closely intertwined with a country's economic activity, TML's leading position in one of the high growth emerging markets, India, should place the company in good stead. The populous nation's favorable demographics and rising consumption will drive its government's large push towards infrastructure investments, keeping demand for CVs steady. Moreover, a slew of new models and model variants across different price points, persistent focus on branding and customer satisfaction will, in Moody's view, help TML India's CV business achieve volume growth of 2%-5% over the next two fiscal years.