Tata Motors faces rating downgrade
Fitch Ratings downgraded the credit ratings of Tata Motors to BB- from BB, while also lowering its outlook to negative. Following this, the stock experience negative sentiments on Thursday.
The downgrade is attributable to mounting risks to its profitability and free cash flows, both of which are already at subdued levels. Fitch anticipates the company’s profits and free cash flows to dwindle over the course of two to three years. The rating agency also downgrades Tata Motors’ subsidiary Jaguar Land Rover Automotive Plc on July 16, 2019.
The company is facing growing risks in its domestic business as well as in its British subsidiary, JLR. The parent company intends to invest further in order to give a boost to its competitiveness in the long-run and make it more sustainable. However, this will exert pressure on margins and weaken the leverage as well. The expectation of elevated leverage on a consolidated basis engendered a negative outlook for the company.
Furthermore, macroeconomic risks such as the emerging global tariffs situation and the ambiguity concerning the outcome of Brexit talks have dampened the company’s prospects, particularly in JLR. There is an alarming level of production-sales mismatch as a large chunk of the company’s production base is concentrated in Britain. To make matters worse, JLR’s dependence on diesel models makes it even more susceptible to adverse regulations in Europe. The car manufacturer intends to make electric variants available in the markets by 2020; however, any unexpected delays could impair sales figures.
Nonetheless, JLR is at an advantage as compared to its peers because it enjoys greater resilience to economic cycles. However, owing to its small scale, it is unable to derive the same level of economies of scale from its investments as its larger-scale peers.
On Thursday, the shares of Tata Motors opened at Rs. 151.70 and hit a high and low of Rs. 152.55 and Rs. 143.75, respectively. The stock closed at Rs. 144.35, down 4.56 per cent.