Tata Motors' balance sheet strength to offset demerger, acquisition risks: S&P Global Ratings

Economic Times

3 days ago

Tata Motors' balance sheet strength will offset the impact of the demerger of its commercial vehicle business and risks associated with the proposed acquisition of Italian firm Iveco, S&P Global Ratings said on Thursday. The company's credit profile is evolving amid the proposed acquisition of Iveco Group, the upcoming demerger of the commercial vehicle business, slowing demand, and tariff uncertainties, S&P Global Ratings said in a statement.
Its balance sheet strength remains intact despite a slew of recent developments, it added.
"The Iveco acquisition will not affect our rating on Tata Motors (BBB/Stable/--). This is because the rated entity will only house the passenger vehicles business after the demerger, which will likely conclude shortly," the ratings agency said. A new entity will hold the commercial vehicle business, and Iveco will fall under this entity once the acquisition is complete, possibly by April 2026.
Last month, Tata Motors announced that it would acquire Italian commercial vehicle maker Iveco Group, excluding its defence business, for euro 3.8 billion (nearly Rs 38,240 crore) in a deal which is set to be the Indian automaker's biggest buyout. S&P Global Ratings further said Tata Motors' passenger vehicle business will be under Tata Motors Passenger Vehicles Ltd. The company will include TML Holdings Pte. Ltd. (BBB/Stable/--), the holding company for the group's international operations and issuer of the rated senior unsecured notes. "We view Tata Motors' proposed acquisition of Iveco as strategic. It will expand the group's scale and geographic diversity. We estimate the acquisition will increase Tata Motors' commercial vehicles revenue and EBITDA by about 2x from fiscal 2026 (year ending March 31) levels," it noted. The combined business's revenue of about USD 25 billion will position it closer to rated peers, such as PACCAR Inc. (USD32 billion) and Traton SE (USD43 billion). Iveco's presence in Europe and Latin America will also reduce the geographic concentration of Tata Motors' commercial vehicles manufacturing. However, Iveco is not a market leader in its key markets. It also has limited direct synergies with Tata Motors' commercial vehicles portfolio, given their different pricing range, S&P Global Ratings said. Stating that Iveco's acquisition will increase debt at Tata Motors' commercial vehicle business, the ratings agency said, "The treatment of Iveco's asset-backed securitisation of receivables as debt will be a key consideration while assessing the commercial vehicles business' financial position."
It further noted that the performance of the passenger vehicles business, including its subsidiary, Jaguar Land Rover Automotive PLC (JLR), is likely to remain weak through fiscal 2026. "Geopolitical uncertainties pose significant downside risks. Commercial vehicle sales volumes are also likely to remain under pressure, but higher realisations could temper the impact on revenues," it said. Still, S&P Global Ratings said, "Tata Motors' efforts to pay down debt over the past two years will allow it to navigate the tough operating conditions. For now, we estimate the company's ratio of funds from operations to debt will stay above 100 per cent over the next 12-24 months, maintaining sufficient headroom versus the downside trigger of 40 per cent." On its stable rating outlook on Tata Motors, the ratings agency said it "reflects our expectation that the company will maintain a strong balance sheet, with a sound operational performance."
The outlook also reflects JLR's continued progress in its transition to production of electric vehicles, including the launch of an electric Range Rover model by the end of the year, it said.