Fitch downgrades Tata Motors to 'B' on Covid-19 impact; outlook negative

Rating agency Fitch has downgraded Tata Motors Ltd’s Long-Term Issuer Default Rating (IDR) from “BB-” to 'B' on significantly lower profitability and cash flow expectations over the next few years. The Outlook is negative.

The agency said Covid-19 will impact demand and lead to disruption in Tata Motors' Indian operations. Key auto markets globally that are served through its fully owned UK-based subsidiary, Jaguar Land Rover Automotive plc, will also be impacted.

“We estimate that Tata Motors' consolidated EBITDA generation will drop by nearly 50 per cent year-on-year in the financial year ending March 2021 (FY21) and will remain below FY19 levels in FY22 even with a recovery,” Fitch said in a statement.

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There is expectation of sharp deterioration in Tata Motors' free cash generation and leverage, as the company will have limited flexibility to lower heavy investment. Despite lower profitability, particularly at JLR, it needs to bolster its long-term competitiveness in view of emerging industry trends.

The negative outlook reflects risks to Tata Motors' financial profile from a prolonged pandemic that could result in further deterioration in the company's profitability. It could exert greater pressure on its liquidity than currently envisaged. Fitch rates TML on a consolidated basis. 

In India, auto industry conditions remain weak, with sales volume for passenger as well as commercial vehicles declining by more than 15 per cent and 25 per cent, respectively, in FY20. The fall in Tata Motors' volume has been even sharper, at 35 per cent.

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The pandemic will further weaken demand in FY21, as it will compound higher ownership costs following the implementation of stricter BS VI emission norms