Tata Motors Demerger Gets A Thumbs Up From Moody's Ratings

Moody's Investor Service has affirmed Tata Motors Ltd.'s credit ratings with a positive outlook on the belief that a planned demerger in the company will deliver growth while maintaining a balanced financial policy.

The US-based credit ratings agency assigned India's most valuable automaker a Ba3 rating with a favorable outlook for both its corporate family and senior unsecured instrument ratings.

"The company's (Tata Motors') strong foothold, with about 40% share in India's growing CV (commercial vehicle) industry, and the business' demonstrated ability in generating large free cash flow through industry cycles will support its credit profile," Kaustubh Chaubal, senior vice president at Moody's Investors Service, wrote in a March 6 note.

"With unit sales of less than 0.5 million, revenues of around $9 billion and Ebitda margins at about 8%, TML's CV operations will likely generate ample free cash flow with credit metrics substantially strong for a Ba3 CFR."

Tata Motors is seeking to split its passenger and commercial vehicle businesses into two listed companies as India’s most valuable automaker looks to unlock value and turn debt-free over the next couple of years.

As of Dec. 31, 2023, Tata Motors had a net automotive debt of Rs 29,200 crore even as its free cash flow has improved—Rs 6,400 crore in Q3 FY24 from Rs 5,300 crore a year ago. At Jaguar Land Rover, its luxury car division, free cash flow stood at £626 million in Q3 FY24 and £1.4 billion in the nine months to Dec. 31, even as debt almost halved year-on-year to £1.6 billion, according to the company’s third-quarter financials.

“On our net debt journey, I expect Tata Motors’ domestic business to become near net debt zero in FY24 and JLR the following year,” Tata Sons Chairman Natarajan Chandrasekaran said at the carmaker's annual general meeting in August last year.

As of Dec. 31, Tata Motors had a debt-to-equity ratio of 1.58, down from 3.68 a year earlier.

Moody's considers that the company's credit profile will continue to improve with or without the demerger. Any substantial deviation from this expectation would weigh on the rating.