Moody's Investors Service has upgraded the ratings of several Tata Group companies to reflect its expectations of parental and systemic support in the case of need.
Moody's has upgraded the ratings of Tata Consultancy Services, Tata Motors, Tata Steel, Tata Steel UK Holdings, Tata Power and Tata Chemicals. The ratings of Jaguar Land Rover Automotive Plc and Tata Chemicals North America Inc. have not been affected by the rating actions.
"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," said 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," Greene said.
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 (initial public offering), TCS has become India's largest business process services/IT services outsourcing company and a leading, globally competitive business.
With a market capitalisation of $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, Moody's stated.
Tata Sons sold a small amount of TCS shares in 2007-08 and 2008-09 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 $2.7billion, equivalent to over 20% of its revenues. With only small capex (capital expenditure) 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 2013-14, TCS has paid dividends worth $2.8 billion and has already paid a $1.3 billion special dividend in 2014-15. Tata Sons is 66%-owned by philanthropic trusts created by generations of the Tata family. Stating that such shareholders are unlikely to inject new equity into Tata Sons, Moody's said that it expects 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," Greene said.
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