The rating agency removed Tata Motor’s previous rating watch negative where it was placed on February 6, 2019. “The downgrade reflects the reduction in Fitch’s expectations for TML’s profitability and free cash generation in the next two-to-three years. Fitch revised its estimates because business risks have increased in both its India operations and its fully owned UK-based subsidiary, Jaguar Land Rover Automotive plc (JLR, BB-/Negative), while TML is likely to invest to bolster its long-term competitiveness,” said the Fitch report.

JLR’s heavy reliance on sales of diesel variants exposes it to unfavourable regulations in Europe. JLR plans to offer electric variants for all of its models by 2020, but unexpected delays could dampen sales performance. “We expect India’s auto sales volumes to stabilise gradually with the re-election of the government in May 2019, but prolonged weakness in sales would exert further pressure on leverage,” the report said.

In the rating drivers, Fitch said growth trends in monthly sales volume of passenger and commercial vehicles in India have worsened after turning negative in December 2018 due to constrained liquidity at NBFCs and excess capacity caused by relaxation of axle load standards for CVs.

“In particular, TML’s sales volumes fell by more than 20% in the first quarter of the financial year ending 31 March 2020 (FY20). Fitch expects a low double-digit decline for FY20 because of still-weak liquidity at lenders and slowing GDP growth.

“The negative outlook reflects limited rating headroom, given our expectation of elevated leverage on a consolidated basis, and risk of further deterioration in TML’s profitability and leverage. Uncertainty around an orderly outcome of Brexit negotiations and the evolving global tariffs situation pose risks, in particular to TML’s JLR business, which faces a significant level of production-sales mismatch due to concentration of its production base in the UK,” said Fitch Ratings in its report.