Fitch expects the capex to be funded largely from TML’s operational cash flows supported by the continuing sound operations of Jaguar Land Rover (JLR) and improvement in its Indian business. Furthermore, the company announced its rights issue plan, which if successful will further strengthen the financial profile.
Robust Performance of JLR: Fitch expects JLR’s sales and profitability to continue to be robust over the medium term, supported by a strong product pipeline and healthy global demand for premium vehicles. This is in spite of a likely increase in costs associated with the company’s large capex and increasing competition. JLR’s EBITDA margin strengthened to 19.9% during 1HFY15 (1HFY14: 16.7%) supported by growth in volumes (13.8%) and a richer product and geographic mix.
Indian Operations to Improve: Fitch expects TML’s new product launches, both in passenger car and commercial vehicles, to drive volume growth in its Indian operations. In addition, lower fuel prices, improving consumer sentiment and a likely reduction in borrowing costs are likely to support improvement in demand growth in passenger cars from FY16. We also expect medium and heavy commercial vehicles (M&HCV) volumes to grow in FY16 – supported mainly by replacement demand.
TML’s operations turned around in 3QFY15 as a result of positive volume growth in its passenger car and M&HCV segments. The company’s volumes fell until 1HFY15, resulting in negative EBITDA in FY14 and 1HFY15.
Linkages with Tata Group: The FC IDR of TML continues to benefit from a one notch uplift on account of the potential support from the Tata group. Fitch has also reviewed the ability of the Tata group to provide support to TML and in the context of potential group support, TML continues to benefit from the strategic importance of TML to the group. Any weakening of linkages between the group and TML, and/or the group’s inability to provide support is likely to affect the ratings negatively.