The ratings agency downgraded the CFR of TML and the company’s senior unsecured instruments rating has been downgraded to Ba3 from Ba2 and stated that the outlook remains negative. It also dowgraded the CFR of Jaguar Land Rover (JLR) to B1 from Ba3 and the probability of default rating (PDR) to B1-PD from Ba3-PD.

Concurrently, Moody’s has also downgraded the instrument ratings on the bonds to B1 from Ba3 and stated that the outlook remains negative.

Although Tata Motors had reported its first profit for the financial year 2018-2019, as it recorded a consolidated net profit of Rs 1,108.86 crore for the three months of January-March 2019, the ongoing stress in the China market for the company’s cash cow JLR meant it came in almost half of what it was in the quarter ended March 31, 2018.

The profit, Tata Motors management said, was on the back of a substantial correction in inventory of JLR in the company’s Chinese business.

“The downgrade reflects the sustained deterioration in TML’s credit profile, with weaker than anticipated credit metrics — led by the weak performance of its 100% owned subsidiary Jaguar Land Rover — and our expectation that it will take longer than we had previously expected for the company’s free cash flows to return to positive territory,” said Kaustubh Chaubal, lead analyst for the company at Moody’s.

Commenting on JLR, the firm said that the downgrade reflects Moody’s expectation that leverage will remain elevated and free cash flow negative for fiscal years 2020 and 2021 as Jaguar Land Rover seeks to turn around performance in China, executes its restructuring programme and continues to invest in its future model line-up including electrification.

“The negative outlook further reflects the challenge to turn around financial performance in a subdued market environment and as other manufacturers also prepare to launch electric vehicles. Risks regarding a potential ‘no-deal Brexit’ or potential US tariffs also remain,” said Tobias Wagner, senior analyst at Moody’s.

JLR, which contributes around 78% of the company’s overall revenues, has been going through problems during the year with falling sales due to a decline in demand of diesel vehicles, slowing business in a key market like China and uncertainties over Brexit.

TML’s credit metrics for the fiscal year ending March 2019 (fiscal 2019) were significantly weaker than Moody’s previous expectations, with consolidated debt/EBITDA leverage of 5.3x and adjusted EBITDA margins of just about 0.9%, both breaching the downgrade triggers for the earlier Ba2 ratings.

While the company’s restructuring efforts should prevent a further deterioration in its credit metrics, Moody’s expects leverage will remain around 5x, EBITDA margins weak and under 3%, and cash flows will remain negative for at least the next 18-24 months. According to the ratings firm India’s auto sector also faces challenges from slowing sales due to overcapacity, tightening liquidity, and a shrinking dealer network.

As for JLR, the downgrades reflect Moody’s expectation that Moody’s-adjusted debt/EBITDA is likely to remain above 5x for fiscal 2020 and 2021 while free cash flow is likely to remain materially negative, it said.

The Chinese market remains a major challenge for JLR as retail sales continue to decline. Moody’s believes that China was a major profit contributor and hence the decline substantially contributed to the decline in profitability in the last quarters, Moody’s observed.