Add Tata Capital Ltd for the Target Rs.410 by Emkay Global Financial Services Ltd
About a year after listing, Tata Capital continues to impress with its execution, with growth, asset quality, credit costs, and profitability broadly tracking guidance. We recently interacted with the management to assess the current environment amid a host of external factors, including:
1) RBI’s draft amendment directions restricting NBFCs from offering revolving credit
2) excess systemic liquidity driven by strong FCNR (B) deposit mobilization by banks
3) sustained macro uncertainty amid persistently high crude prices and renewed risks from US trade sanctions. Overall, the management response provided sufficient comfort on TATACAP’s ability to deliver its FY28 guidance of:
1) AUM growth of ~23%-25% over FY25-28
2) credit cost and NNPA<1%
3) cost-to-income ratio of ~33%-34%
4) ROA/ROE of 2.5%-2.7%/17%- 18%. We reiterate ADD on the stock, with broadly unchanged estimates and an unchanged Sep-27E TP of Rs410.
Clarity awaited on revolving credit, impact manageable
RBI has received stakeholder feedback on the Draft Amendment Directions and sought data and clarifications on NBFCs’ revolving credit facilities, including LAS, business loan overdrafts, supply chain financing, and personal loan overdrafts. Under the strictest definition of a “revolving facility”, ~8-9% of Tata Capital's AUM falls into this category. However, based on customer behavior, ~3-4% could transition to “term loans”, limiting the potential impact to no more than 5% of AUM even under a stringent regulatory framework. Given that a large portion of SMEs receiving revolving credit lines from NBFCs have no such facilities from banks, the deeper reach and origination capabilities of NBFCs and fintechs, and the regulatory framework already considering undrawn overdraft lines in liquidity and capital requirements, it is less likely that RBI will bar NBFCs from this business, in our view.
FCNR deluge unlikely to drive lower COF for NBFCs
Despite excess systemic liquidity driven by strong FCNR(B) deposit mobilization by banks, interest rates for one-year and longer tenors have not declined and have, in fact, increased. Looking ahead, with the upcoming shallow rate-hike cycle, COF is likely to increase, however, the company’s ALM ensures no negative impact on margin. The FCNRled strong deposit growth could drive aggressive lending by banks in prime home loans and highly rated corporate loans.
Progressing on guided path of growth, credit costs, and profitability
Supported by robust credit demand across the retail, SME, and corporate segments, the company continues to grow within its guided range and expects growth to strengthen further once the Tata Motors Finance book returns to growth from 3Q. On the margin front, the impact of stronger growth in high-yielding products should start flowing through from 2H, while 2Q margins are expected to broadly track 1Q levels. On operating leverage and credit costs, the company’s actual experience continues to be better than the management expectations.
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