We view Tata Motors as “Medium Risk” on the LARA scale. The company has weathered the impact of the COVID-19 pandemic better than expected. Compared to other major automotive players, Tata Motors is small in terms of scale and product offerings. Meanwhile, the global market is becoming increasingly consolidated. The large capex required for the company to catch up in terms of electric and petrol vehicle development (in the latter case due to diesel falling out of favour) will likely restrict its ability to generate FCF and deleverage.
That said, Jaguar Land Rover (JLR) has a respectable position in the premium (luxury) auto market and highly differentiated product offerings (superior off-road capability), while Tata Motors India boasts a strong position in the domestic commercial vehicle market. We also note positively Tata Group’s reputation and the likelihood of extraordinary support from parent Tata Sons.
Our fundamental Credit Bias on Tata Motors is “Negative”. This is due to JLR’s weak sales and production, in turn owing to the ongoing semiconductor shortage.
Controversies are “Immaterial” and the ESG Impact on Credit is “Neutral”. The auto industry is exposed to environmental risks in general, with stringent regulations pushing the industry towards zero-emissions vehicles and away from others (e.g. diesel). The industry is also exposed to fines related to the disclosure of emissions or manipulation of test results to attain certain emissions standards.
That said, Tata Motors has navigated the challenging operating environment very well in the wake of Volkswagen’s emissions scandal. The company has not been penalised by regulators.