"The downgrade reflects the reduction in Fitch's expectations for Tata Motors' 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 Britain-based subsidiary Jaguar Land Rover (JLR) Automotive plc while Tata Motors is likely to invest to bolster its long-term competitiveness," it said.
This will result in sustained deterioration in Tata Motors' financial profile, including its leverage. The rating action follows a similar action on JLR's rating on July 16. Fitch rates Tata Motors on a consolidated basis including 100 per cent of JLR, considering its ability to access cash at JLR despite weak legal and operational ties.
"The negative outlook reflects limited rating headroom, given our expectation of elevated leverage on a consolidated basis and risk of further deterioration in Tata Motors' profitability and leverage," said Fitch.
Uncertainty around an orderly outcome of Brexit negotiations and the evolving global tariffs situation pose risks, in particular to Tata Motors' JLR business which faces a significant level of production-sales mismatch due to concentration of its production base in Britain.
Tata Motors' sales volumes fell by more than 20 per cent in the first quarter of financial year ending March 31. Fitch expects a low double-digit decline for FY20 because of still-weak liquidity at lenders and slowing GDP growth.
The auto major's India business also faces additional risks from the implementation of tighter emission standards under BS6 starting from April 2020, which will raise production costs and therefore could affect industry volumes and automakers' margins.