Chennai, Feb 2 (IANS): Global credit rating agency Moody's Investors Service (Moody's) Monday termed Tata Motors Ltd's (TML) Rs.75 billion rights issue as credit positive as it would reduce its debt and fund business growth.

"The reduced leverage positions TML firmly within its rating, and could pave the way for upward rating pressure on the back of a clear turnaround in its Indian business," said Alan Greene, Moody's vice president - senior credit officer.

According to Moody's the proposed equity injection will also reduce the need for TML to take out cash from its subsidiary, Jaguar Land Rover Automotive Plc (JLR).

Britain based JLR has been paying a dividend of 150 million pounds to Tata Motors Holdings Ltd (TMHL), which has been transmitted through to TML intact, Moody's said.

This has offset TML's stand-alone losses from operations, resulting in a small net profit.

"The lack of profitability has led to TML reducing its dividends, which is counterintuitive to the growth of its consolidated net income and the strong performance of JLR," said Greene.

"Paying down debt at the parent will also relieve financial covenant pressure for TML."

The TML 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, the rating agency said.

Moody's believes that the need to minimise any call on incremental funds from JLR at a time of increased uncertainty in the Euro zone, together with the near doubling of TML's share price in the last year, were key factors behind the rights issue decision.

While JLR buys some parts from Europe, and now has its joint venture factory in China operational, its large British assembly operations and cost base may affect its competitiveness relative to its German competitors, such as BMW, Volkswagen AG, Audi and Daimler AG, Mercedes-Benz cars, if the Euro were to weaken significantly relative to GBP.

Furthermore, while its 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, the rating agency said.