Moody's Investors Service has upgraded the ratings of several Tata Group companies to reflect our expectation of parental and systemic support in the case of need, which has been exhibited both in the form of extraordinary financial support from Tata Sons (unrated), the ultimate parent, and ongoing support through their close association with the Tata brand.
Tata Motors (TML)- Corporate family rating upgraded to Ba2/Stable from Ba3/Stable. Tata Chemicals (TCL) - Corporate family rating upgraded to Ba1/Stable from Ba2/Stable. Tata Steel (TSL) - Corporate family rating upgraded to Ba2 from Ba3 and remains on review for upgrade. Tata Power Company (TPL)-Corporate family rating upgraded to Ba3/Stable from B1/Negative, and senior unsecured rating upgraded to Ba3/Stable from B2/Negative, thus no longer notching for subordination. Tata Consultancy Services (TCS)- Local currency issuer rating affirmed at A3/Stable.
Tata Steel UK Holdings (TSUKH) -Corporate family rating upgraded to B2 from B3, probability of default rating upgraded to B2-PD from B3-PD and the ratings of its term loan and revolving credit facilities upgraded to B2/LGD 3(49%) from B3/LGD 3(49%) with all ratings remaining on review for upgrade.
The ratings of Jaguar Land Rover Automotive plc (JLR, Ba2/Stable) and Tata Chemicals North America Inc. (TCNA, Ba3/Stable) have not been affected by today's rating actions.
The multiple rating actions are based on the track record of Tata Sons in providing timely support to its investee companies and Moody's assessment of its ability to provide future support, and on the need to protect the brand reputation of Tata from the consequences of an entity's distress.
''In recent years, we have seen Tata Sons inject money, typically through equity rights issues, into its companies, to fund their growth plans or to bolster any weak balance sheets'', says Alan Greene, a Moody's vice president, senior credit officer.
''As Tata's involvement in consumer facing businesses in India increases, coupled with its growing international presence, the Tata name, with more than 100 years of history, has become a globally significant brand and is therefore critical to maintain the Group's standing with customers, employees and investors alike,'' says Greene who is lead analyst for all Tata companies, with the exception of Tata Power.
Dividends paid by TCS, a 73.7%-owned subsidiary, are the predominant source of funds for Tata Sons. In the 10 years since its IPO, TCS has become India's largest business process services/IT services outsourcing company and a leading, globally competitive business. With a market capitalisation of USD 83 billion, TCS is the largest listed company in India, and in theory offers the parent additional options of selling down even small stakes to support liquidity within the group. Tata Sons sold a small amount of TCS shares in FY 2008 and FY2009 but has subsequently relied on the dividend flexibility of TCS and its own borrowings to fund its investment plans.
TCS presently generates cash from operations of over USD 2.7 billion, equivalent to over 20% of its revenues. With only small capex needs and a strong focus on organic rather than acquisition-driven growth, a substantial portion of the cash can be paid out as dividends. The dividend payout ratio has been 40% in the 10 years since its IPO.
In the three years to FY 2014, TCS has paid dividends worth USD 2.8 billion and has already paid a USD 1.3 billion special dividend in FY 2015.
Tata Sons is 66%-owned by philanthropic trusts created by generations of the Tata family. Such shareholders are unlikely to inject new equity into Tata Sons and so Moody's expects the shareholders to be accommodative with respect to the cash needs of Tata Sons and to support its plans for investment in Group businesses.
''While we believe that support from Tata Sons is ultimately available to the operating companies, it is beholden on the companies themselves to run sustainable balance sheets and contain any losses'', adds Greene.
Over the last three years while the four core rated Tata companies together with Tata Communications (unrated) and Tata Teleservices (unrated) have performed modestly against a backdrop of slower economic growth in India and losses in certain large overseas subsidiaries and domestic project vehicles, Tata Sons has provided timely support and thus confidence to fellow shareholders and lenders.
''With glimpses of recovery in some of the worst affected sectors of the Indian economy, the bulk of Tata Sons' disbursals can now be directed into the group's growth areas and not into resolving old troubles'', says Greene.
