"The reduced leverage positions TML (Tata Motors Ltd) firmly within its rating, and could pave the way for upward rating pressure on the back of a clear turnaround in its Indian business," Moody's Vice President - Senior Credit Officer, Alan Greene said in a statement.

The ratings agency further said that equity injection would also reduce the need for TML to take out cash from its subsidiary, Jaguar Land Rover (JLR).
    
JLR has been paying a dividend of 150 million pounds to Tata Motors Holdings Ltd (TMHL) that goes to TML and has helped the Indian auto maker offset its standalone losses from operations and post a small net profit.

"The lack of profitability has led to TML reducing its dividends, which is counter-intuitive to the growth of its consolidated net income and the strong performance of JLR," Greene added.
    
Tata Motors' rights issue should therefore reduce the risk of diverting JLR's own financial resources to its owner, which is positive given also its own expansion plans that will require higher capital expenditure, Moody's said.

"Moody's believes that the need to minimise any call on incremental funds from JLR at a time of increased uncertainty in the Eurozone, together with near doubling of TML's share price in the last year, were key factors behind the rights issue decision," it added.
    
The agency further said that JLR's large UK assembly operations and cost base may affect its competitiveness, relative to its German competitors such as BMW, Audi ÀÝ3and Mercedes-Benz cars, if the euro were to weaken significantly relative to the pound.
    
Furthermore, while TML's Indian sales are turning up – with the medium and heavy commercial vehicle sector recovering rapidly -- the new Zest sedan and Bolt hatchback have been well received but their combined sales have yet to fully ramp up, Moody's said.
    
Tata Motors had said it would use proceeds of the rights issue to fund various activities, including introduction of more than 100 new commercial vehicles over next three years and passenger vehicles on new modular platform from FY17.

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