CRISIL, in its base case, expects Tata Motors' consolidated net-debt-to-EBITDA to remain elevated at about 2.4 times in fiscal 2020 and 2021, from about 2 times for fiscal 2019.
Shares of Tata Motors fell 2.6 percent intraday on August 16 after CRISIL downgraded its long term rating amid weakening risk profile of Jaguar Land Rover.
The stock lost more than half of its value in the last one year. It was quoting Rs 119.20, down Rs 1.65, or 1.37 percent on the BSE at 0942 hours.
CRISIL in its release said it has downgraded rating on the long-term bank facilities of Tata Motors (TML) to 'AA-/Negative' from 'AA/Negative', but reaffirmed rating on short term bank facility, commercial paper and short-term debt at 'A1+'.
The rating downgrade factors in a further weakening of outlook on the business risk profile of Jaguar Land Rover Automotive PLC (JLR), it added.
The rating agency expects JLR's global volumes to increase marginally by 1-2 percent in FY20 versus an expectation of about 5 percent earlier, mainly due to continued weakness in the China market.
"Continued weak sales volumes and profitability, coupled with sizeable necessary capex continues to constrain the outlook for free cash flows. Moreover, continued uncertainty around the terms on which Brexit is concluded continues to pose risks to JLR's business profile. An adverse outcome on Brexit for JLR may result in significant disruptions to its supply chain, and elongate its working capital cycle," it reasoned.
JLR's wholesale volumes declined about 10.8 percent in fiscal 2019 over the previous fiscal and were about 10 percent lower year-on-year in Q1.
Reduction in volumes have been largely driven by slowdown in China, ongoing uncertainties around diesel vehicles in Europe, and weaker volumes in overseas markets.
Given the high operating leverage in this business, declining volumes have impacted profitability, reflected in operating margins of 8.2 percent in FY19 and 4.2 percent in Q1 FY20, down from 10.8 percent in FY18 and 6.2 percent in Q1 FY19.
Increase in product-related warranty costs and continued pressure on pricing have also constrained JLR's profitability, CRISIL said, adding high level of investments should result in negative free cash flow to the tune of 500 million pound to 1 billion pound for fiscal 2020, while free cashflows are now expected to remain negative up to fiscal 2021.
The rating agency, in its base case, expects Tata Motors' consolidated net-debt-to-EBITDA to remain elevated at about 2.4 times in fiscal 2020 and 2021, from about 2 times for fiscal 2019 (fiscal 2020 and 2021 leverage ratios include the impact of IFRS 16).
JLR sales volumes are expected to increase marginally in the current fiscal, while margins should improve slightly over the previous fiscal, it said.
CRISIL further said the rating may be downgraded in case of further deterioration of the business environment, significantly impacting JLR's volumes and profitability.
A higher-than-expected deterioration in consolidated net debt/EBIDTA and expectation of it sustaining over 3.2 times over fiscal 2020 and 2021 may also result in a downgrade of rating, it added.Nevertheless, the rating is supported by measures being taken by the management of JLR, to turn around volumes and preserve cash flows with its 'Project Charge' initiative, said CRISIL.Subscribe to Moneycontrol Pro and gain access to curated markets data, trading recommendations, equity analysis, investment ideas, insights from market gurus and much more. Get Moneycontrol PRO for 1 year at price of 3 months at 289. Use code FREEDOM.