Tata Motors' Balance Sheet Strength to Offset Risks from Demerger and Iveco Acquisition

Tata Motors' balance sheet strength will offset demerger and acquisition risks, according to S&P Global Ratings. The company's credit profile is evolving with the proposed acquisition of Iveco Group and upcoming demerger of commercial vehicle business. However, Tata Motors' balance sheet remains intact despite recent developments. The acquisition of Iveco will expand the company's scale and geographic diversity, but its impact on the commercial vehicles business will need to be carefully considered.

S&P Global Ratings has recently analyzed the impact of Tata Motors' demerger and acquisition of Iveco Group on the company's credit profile. The ratings agency stated that while the company's balance sheet strength remains intact despite these developments, the proposed acquisition and demerger pose certain risks. However, S&P Global Ratings expects that Tata Motors' balance sheet strength will offset these risks and maintain a stable credit rating.

The proposed acquisition of Iveco Group, an Italian commercial vehicle maker, is set to expand Tata Motors' scale and geographic diversity. The acquisition is expected to increase Tata Motors' commercial vehicles revenue and EBITDA by about 2x from fiscal 2026 levels. The combined business's revenue of about USD 25 billion will position it closer to rated peers such as PACCAR Inc. (USD 32 billion) and Traton SE (USD 43 billion).

However, S&P Global Ratings also noted that Iveco is not a market leader in its key markets and has limited direct synergies with Tata Motors' commercial vehicles portfolio. The treatment of Iveco's asset-backed securitization of receivables as debt will be a key consideration while assessing the commercial vehicles business' financial position.

The upcoming demerger of Tata Motors' commercial vehicle business will create a new entity that will hold the commercial vehicle business, with Iveco falling under this entity once the acquisition is complete, possibly by April 2026. The ratings agency expects that the demerger will not affect its rating on Tata Motors, as the rated entity will only house the passenger vehicles business.

S&P Global Ratings also noted that the performance of Tata Motors' passenger vehicles business, including its subsidiary, Jaguar Land Rover Automotive PLC (JLR), is likely to remain weak through fiscal 2026. The company's efforts to pay down debt over the past two years will allow it to navigate the tough operating conditions. For now, S&P Global Ratings estimates that the company's ratio of funds from operations to debt will stay above 100% over the next 12-24 months, maintaining sufficient headroom versus the downside trigger of 40%.

The ratings agency's stable rating outlook on Tata Motors reflects its expectation that the company will maintain a strong balance sheet and sound operational performance. This 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.

Tata Motors is also in the process of completing the demerger of its commercial vehicle business, with the final hearing for the scheme of demerger concluded by the National Company Law Tribunal on August 8. The company hopes to complete the demerger by October 1, 2025.

References:
[1] https://money.rediff.com/news/market/tata-motors-demerger-iveco-acquisition-impact/31969120250814
[2] https://www.financialexpress.com/business/industry-tata-motors-demerger-nclt-reserves-decision-company-targets-demerger-on-october-1-3940694/
[3] https://economictimes.indiatimes.com/markets/stocks/news/tata-motors-shares-in-focus-as-q1-pat-slumps-63-yoy-motilal-oswal-cuts-target-price-to-rs-631/articleshow/123227124.cms
[4] https://www.livemint.com/market/market-stats/stocks-tata-motors-share-price-nse-bse-s0003022