Jaguar Land Rover weakness drives Tata Motors deeper into junk rating

MUMBAI -- S&P Global Ratings lowered the credit rating of Tata Motors and its Jaguar Land Rover unit deeper into junk on Tuesday, citing weaker-than-expected profitability at JLR.

JLR has been hit hard due to trade tensions between China and the United States, low demand for diesel cars in Europe and worries over Brexit.

S&P lowered Tata Motors' long-term issuer credit rating and long-term issue rating on its U.S.-dollar-denominated senior unsecured notes to BB- from BB, the second downgrade for the Indian automaker in five months.

The automaker's rating remains on credit watch with negative implications given uncertainties around Brexit and will be revisited once the outcome for the UK move to leave the EU is clearer, S&P said.

Tata Motors posted a larger-than-expected 10.49 billion rupees ($141.8 million) quarterly loss on Oct. 31. The company unveiled a turnaround drive for JLR called "Project Charge," which included cost cuts and cash flow improvements of 2.5 billion pounds ($3.2 billion) over 18 months.

JLR has reduced the number of production days at its UK plants in Castle Bromwich and Solihull. As part of the turnaround plan, JLR will first focus on cash saving "quick wins" such as reducing nonproduct investments and speeding asset sales, Tata said in an investor presentation. In the near term it will improve efficiency in areas including purchasing and material costs, manufacturing and logistics, and people. It will also focus on strategic and noncore asset sales, Tata said.

S&P considers the company's cost cut target to be aggressive. It forecasts that JLR will have "significant negative free operating cash flows over the next two years, resulting in weak financial ratios for Tata Motors."

JLR said new vehicles such as the new Range Rover Evoque, the recently launched Jaguar I-Pace full-electric crossover and the upcoming new Land Rover Defender will boost its business. The automaker also will offer a hybrid or electric version of all its models by 2020.

S&P said recently launched and upcoming products may help to prop up growth but competition in the luxury car market may hurt margins.

S&P expects Tata Motors' leverage to deteriorate over the next 12-18 months, given its ongoing cash losses at JLR.