CRISIL on Friday said it has upgraded its ratings on Tata Motors Ltd’s (TML’s)

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bank facilities and short-term debt programme to ‘A+/Stable/P1+’ from ‘A/Stable/P1’. CRISIL has also assigned its ‘A+/Stable’ rating to the company’s fund-based facilities and ‘P1+’ to the non fund-based facilities, and has reaffirmed its rating on secured, guaranteed, low-coupon, premium redemption debentures, guaranteed by the State Bank of India.

The upgrade reflects CRISIL’s belief that the improvement witnessed in TML’s Jaguar and Land Rover (JLR) operations during 2009-10 (refers to financial year, April 1 to March 31) is likely to sustain over the medium term on the back of product launches and ongoing efforts to reduce costs, CRISIL said in a statement.

This improvement, coupled with the continued buoyancy in TML’s domestic business, is likely to drive improvement in the company’s profitability and increase in cash accruals over the medium term. CRISIL also believes that the likely infusion of more than Rs12 billion into TML, expected over the near term through

divestments, will reduce the pressure on TML’s capital structure.

The short-term ratings also reflect the easing of liquidity pressure on TML following the recent replacement of short-term debt with long-term funds by the company. Furthermore, CRISIL believes that TML will continue to benefit from its association with the Tata group.

For arriving at its ratings, CRISIL has combined the business profiles of TML and TML’s subsidiaries, including the JLR operations. CRISIL has also made adjustments for the assets and liabilities of the financing business conducted by Tata Motors Finance Ltd, the captive finance subsidiary of TML.

JLR, which accounts for more than 50 per cent of TML’s consolidated revenues, has reported operating profits from the second quarter of 2009-10. The improvement in JLR’s performance has been backed by new product launches and product refreshes, improved realisations arising from a favourable product mix, and lower dealer discounts. CRISIL believes that JLR will continue to report higher sales volumes, and increase in realisations, over the medium term. CRISIL also notes that the cost-saving measures initiated in JLR will reduce its break-even volumes over the medium term, and help maintain improved profitability.

TML has also witnessed robust growth in commercial vehicle (CV) and passenger vehicle sales

volumes in the domestic market during 2009-10, driven by improvement in the overall

macroeconomic conditions, the ratings agency said. CRISIL expects TML to maintain healthy growth in volumes over the medium term.

The improvement at JLR, and the continued growth in domestic demand, has resulted in improvement in TML’s profitability in 2009-10. CRISIL believes that TML’s profitability will continue to improve over the medium term, driven by continued improvement in JLR, and healthy growth in TML’s domestic operations. Improved profitability is likely to result in higher cash accruals and stronger debt protection measures. The company’s ratio of net cash accruals to adjusted debt, which was negative at 2 per cent for 2008-09, is likely to improve to more than 10 per cent over the medium term.

The interest cover, which was at less than 1 time in 2008-09, is likely to improve to more than 3 times over the medium term. CRISIL also believes that the pressure on TML’s capital structure is likely to ease in the near term, given the expected infusion of more than Rs 12 billion into the company over the near term through

divestments.

However, the company’s leverage levels are expected to remain high, primarily because of debt raised to fund the acquisition of JLR. Changes in debt levels will remain a key rating sensitivity factor over the medium term.

The ratings on TML continue to be supported by the company’s strong brands in the high-end luxury segment in the global auto markets. The ratings also derive strength from TML’s strong market presence in the domestic automotive industry, said the ratings major.

TML has a dominating presence across light commercial vehicles (LCVs) and medium and heavy commercial vehicles (M&HCVs), with a market share of around 68 per cent during the ten months through January 2010. It is among the top three players in the Indian passenger car market, with a share of around 14 per cent by volumes during the same period, CRISIL said.