Fitch affirms Tata Motors, Jaguar Land Rover ratings

The rating affirmation factors in the stable consolidated credit profile of TML. TML has benefited from the strong financial performance of JLR in FY12 (year end March), helping to offset the parent's lower revenue growth and profitability. JLR accounted for 63% of TML's revenues and 69% of operating profits in FY12.

TML's standalone performance in FY12 was characterised by revenue growth of 15.3% to INR543,066m and a drop in EBITDA margins to 8.1% from 10.2% in FY11 due to higher selling costs and inability to fully pass on raw material cost increases, particularly in the highly competitive volume segments of passenger cars.

However, on a consolidated basis, revenues grew by 35.6% to INR1,656,545m while EBITDA margins were maintained at 14.3% (FY11: 14.6%), due to JLR's high contribution to revenues and operating profits. In FY12, JLR registered revenue growth of 36.9% to GBP13,511.7bn and EBITDA margins of 14.7%(FY11: 14.8%).

TML's standalone net leverage (net adjusted debt/operating EBITDA) weakened in FY12 to 3.44x from 3.01x in FY11 due to reduced profitability and lower cash levels. However, on a consolidated basis, net leverage improved to 0.98x from 1.21x in FY11 largely due to JLR's relatively lower debt and substantially higher cash balances.

Fitch expects a similar trend to persist in FY13 after the agency lowered its growth forecasts for several segments of the Indian auto industry, as reflected in its report "2012 Mid-Year Outlook: Indian Auto Sector". The agency believes that global premium auto companies will continue to outperform volume segment companies in 2012, which is likely to be reflected in JLR's continued growth rate and relatively higher margins, lending support to TML.

Based on the top down approach of the agency's "Parent and Subsidiary Rating Linkage Criteria", Fitch has notched JLR's rating to a level down from TML's - reflecting the strong linkages between the two entities. TML's rating also benefits from a one notch uplift on account of potential support from the Tata Group. Fitch has assessed the ability of the Tata Group to provide support to TML and draws comfort from the strategic importance of TML to the group.

TML's ratings also take into account its leadership position in terms of sales market share in commercial vehicles and its number three position in the passenger vehicles in the Indian market. Fitch also notes JLR's improvement in diversifying its revenue geographically in FY12 - led by higher China sales, as well as the successful launch of the Evoque in FY12 which will continue to drive volumes in FY13.

The ratings are constrained by JLR's limited product portfolio shorter operating history and relatively lower volumes compared with more established and highly rated premium car manufacturers. In Fitch's opinion, the prevailing weak global economic environment may also pose a challenge for sustaining volume growth over the next one to two years.

WHAT COULD TRIGGER A RATING ACTION?

Negative: Future developments that may, individually or collectively, lead to negative rating action on both companies include:
- a weakening of linkages between the Tata Group and TML
- consolidated financial leverage (excluding TML' financial subsidiary - Tata Motors Finance Limited) exceeding 2.0x on a sustained basis due to reduced sales or profitability (at TML, JLR or both), or due to higher than expected debt
levels - a weakening of linkages between TML and JLR that could negatively impact JLR's rating

Positive: Future developments that could result in positive rating action on
both companies include: - higher volume growth for TML (standalone) and JLR through increased geographic and product diversification, without significant margin erosion from FY12 levels