S&P revises outlook on Tata Motors to stable on improving underlying demand

S & P Global Ratings has affirmed B ratings on Tata Motors and revised outlook to stable on improving underlying demand.

S & P said the company's sales for the fourth quarter of fiscal 2021 indicate a material improvement in underlying demand for both commercial vehicles and passenger cars.

The commercial vehicle business reported its strongest quarterly sales since fiscal 2019 while the passenger car business continued to gain market share.

The passenger car business also turned EBITDA positive in fiscal 2021 and EBITDA margin is likely to improve further to mid-single-digit level in fiscal 2022.

"Although the second wave of Covid-19 infections has increased risks around these estimates, our base case assumes operational disruptions will be mainly in the first quarter of fiscal 2022," said S & P.

"We anticipate earnings will recover in the rest of fiscal 2022 as restrictions ease, similar to what we saw after the first wave in fiscal 2021."

The agency estimates earnings at Tata Motors' Indian operations will rise over the period toward fiscal 2019 levels when the company reported EBITDA of over Rs 7,000 crore.

Earnings at UK-based subsidiary Jaguar Land Rover (JLR) Automotive Plc have also been recovering from the second half of fiscal 2021. At the same time, tighter working capital management has kept debt levels in check.

"As such, we forecast Tata Motors' debt-to-EBITDA ratio (adjusted for capitalised development expenses and restructuring costs) will decline to about 4.0x over fiscals 2022 and 2023 from our estimate of 6.0x-6.5x as of March 31," said S & P.

Implementation risks associated with the business transformation at JLR (Project Reimagine) raise uncertainties over the path of deleveraging. However, the risk is captured at the current rating level, it said.