S&P Global Ratings (S&P) has upgraded the credit ratings of Tata Motors and its core subsidiary, TML Holdings Pte Ltd, to BB+ from BB.

The rating agency said the positive rating outlook reflects the potential for further improvement in Tata Motors’ credit quality over the next 12-18 months, which is predicated on strong earnings, improved cash flow and the ability to stick to its debt reduction targets.

The Tata Motors’ stock surged 2.84 per cent, or Rs 18.55, to close at Rs 671.65 on the BSE on Wednesday.

S&P said Tata Motors’ debt reduction will likely accelerate over the next 12-18 months, driven primarily by strong free operating cash flow (FOCF) at Jaguar Land Rover (JLR).

It expects JLR to report positive FOCF of over £2 billion in the year ending March 2024 and the subsequent fiscal compared with about £500 million in fiscal 2023. This is expected to sharpen the deleveraging effort at Tata Motors.

“In our base case, we expect Tata Motors’ adjusted debt to drop to about Rs 25,000 crore by March 2025, from about Rs 68,000 crore as of March 2023.

The company’s leverage (as measured by the ratio of adjusted debt to EBITDA) will correspondingly decline to slightly below 1 time by March 2025, from close to 3 times as of March 2023,” S&P added.

It noted that the company’s wholesale volumes were steadily improving as operations recover from the chip shortage.

The rating agency expects the firm’s revenue to grow by about 30 per cent in 2023-24, and adjusted EBITDA margin to exceed 10 per cent, from 8 per cent in 2022-23.

According to S&P, debt reduction will be driven by the monetisation of non-core assets.