Moody’s upgrades Tata Motors’ rating to Ba1 from Ba3; outlook remains positive

Moody’s has upgraded Tata Motors Ltd’s corporate family rating to ‘Ba1’ from ‘Ba3′, citing the company’s sustained revenue growth, improving profitability, and debt reduction. This two-notch upgrade, with a positive outlook, also includes the elevation of Tata Motors’ senior unsecured instruments’ ratings to ‘Ba1’ from ‘Ba3’. This upgrade reflects Tata Motors’ robust financial performance, evidenced by substantial free cash flow even amid high capital expenditures and the company’s strategic policies to balance growth with financial discipline.
“The two-notch rating upgrade with a positive outlook follows the company’s sustained track record in achieving revenue growth, improving profitability, and reducing debt using its large free cash flow despite its elevated capital expenditure to refresh its products,” said Kaustubh Chaubal, Senior Vice President of Moody’s Ratings.

Tata Motors’ leverage, calculated by Moody’s adjusted consolidated debt/EBITDA, fell to 1.8 times as of March 2024 from 3.9 times a year prior. This ratio is expected to remain between 1.3 and 1.5 times over the next two fiscal years. Chaubal added that these figures are backed by the company’s policies of balancing growth with financial discipline.

“Today’s rating action considers the impact of TML’s sound governance practices—in particular its creditor-friendly financial policies, track record and management prudence—on its credit profile, which we view as credit positive,” stated the rating agency.

Tata Motors, which acquired Jaguar Land Rover (JLR) from Ford for USD 2.3 billion in 2008, is on track to make this British luxury carmaker debt-free by FY25. The India business of Tata Motors has already achieved debt-free status earlier this year. Tata Motors announced this rating upgrade on the same day it revealed its entry into the mid-size electric vehicle segment with the launch of Curvv EV.

Tata Motors has been instrumental in significantly growing India’s electric vehicle (EV) market. From selling 1,000 units annually in 2018-19, the company boosted this figure to over 1 lakh units in FY24, capturing more than 70% market share in the process. EVs now contribute 12% to Tata Motors’ overall annual sales. Nevertheless, the company did experience a slowdown in the EV fleet segment demand due to the expiry of the Faster Adoption and Manufacturing of Hybrid and Electric Vehicles (FAME-II) scheme in March 2024. In FY24, the EV fleet segment accounted for 10% of Tata Motors’ EV sales, but this share fell to 5% in the first quarter.

For the quarter ending June 30, 2024, Tata Motors reported a 74% year-on-year increase in net profit, reaching ₹5,566 crore compared to ₹3,203 crore in the same quarter the previous year. Revenue from operations rose 5.7% year-on-year to ₹107,316 crore for the first quarter, up from ₹101,528 crore in the corresponding quarter last year. Revenue from its luxury car unit JLR grew by 5.4% to 7.3 billion pounds. However, JLR’s EBITDA margin fell by 50 basis points to 15.8%. JLR’s net debt stood at 1 billion pounds, with gross debt at 4.8 billion pounds.

The operating margin of Tata Motors’ domestic passenger vehicle business improved by 50 basis points year-on-year to 5.8% in Q1 FY25. Regarding profitability, Tata Motors’ EBITDA margin in internal combustion engine (ICE) vehicles held steady at 8.5% in Q1 FY25, slightly down from 8.6% in Q1 FY24. The company significantly improved EV EBITDA margins thanks to material cost reductions and favorable conditions due to lower battery prices.

In addition, the board of Tata Motors approved the demerger of its passenger and commercial vehicle businesses into two separate listed companies. This process is expected to be completed within the next 12 to 15 months.