Tata Motors faces downgrading over JLR Brexit risk

Will Green is news editor of Supply Management
6 February 2019

Tata Motors Ltd (TML) has been warned it faces a downgrading by ratings agency Fitch because of the increasing risk of a disorderly Brexit.

Fitch has put TML on “rating watch negative” because its subsidiary Jaguar Land Rover (JLR) is based in the UK and exposed to “increased tariffs and supply chain disruptions from a disorderly Brexit”.

“JLR, which accounts for the majority of TML’s EBITDA generation, has a significant production bias to the UK despite a reasonable degree of geographic diversification in its sales mix,” said Fitch.

“Trade barriers and logistic issues arising upon a disorderly Brexit could have an impact on JLR’s competitive positioning, and lead to significantly lower sales and profitability and higher working-capital needs.”

Fitch said this was “likely to outweigh improving operating performance in TML’s India business”.

Fitch said TML’s Long-Term Issuer Default Rating of “BB” could be downgraded “by at least one notch”, depending on Brexit negotiations.

Fitch said JLR sold about 20% of its vehicles in continental Europe and the US but “manufactures them quasi-exclusively in the UK”.

“This exposes it to increased tariffs and supply chain disruptions from a from a disorderly Brexit, which could undermine its competitive positioning and affect cash generation.

“JLR’s efforts to diversity its production base will ease the imbalance in the medium term but vulnerabilities remain high in the short term.”

Fitch also mentioned JLR’s “weakening competitive positioning in China” and the impact of tightening emissions regulations on its product range, “which is focused heavily on diesel”.

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