Tata Capital shares are down 12.5% from their all-time high of ₹390.20, hit on 6 August, but remain 5% above their initial public offering (IPO) issue price of ₹326 in October. The recent pressure on the stock could be attributed to risks amid rising funding costs, regulatory uncertainty around revolving loans, and elevated crude prices.
At a recent analyst meeting, Tata Capital expressed confidence that its assets under management (AUM) would grow 23-25%, supported by healthy demand in retail and small and medium enterprises (SMEs), which together account for 85-87% of its portfolio and are expected to gain further share. Its commercial vehicle (CV) loan book inherited from the 2025 merger with Tata Motors Finance is expected to break even in Q3FY27.
Margin pressure
But margins have been narrowing. Calculated net interest margin (NIM) was at a 3-quarter low of 5.03% in Q1FY27, according to Systematix Research. This was down from 5.17% in the previous quarter, as the cost of funds expanded from 7% to 7.3%.
The management expects margins to remain broadly similar in Q2, as bond yields have risen in anticipation of a possible rate-hike by the Reserve Bank of India (RBI) in October. Following the recent rise in crude and weather-led spike in food prices, global interest rates have begun to rise.
As the loan mix improves with a rising share of high-yielding assets and the addition of home loans starting next quarter, margins could expand from Q3. But the recent surge in deposits, driven by foreign currency non-resident (FCNR) deposits, could spur more aggressive bank lending, pressuring Tata Capital’s margins.
It has been increasingly relying on market-linked liabilities. Bank borrowings account for 40% of its liabilities, 84-85% of which is linked to repo or government security rates. This had supported its margins during the rate-cut cycle, and can turn the other way around as rates rise. But 66% of its assets are floating-rate, providing some asset-liability protection.
Another risk stems from the RBI’s proposed framework to ban NBFCs’ revolving credit/flexi loans. Around 8-9% of Tata Capital’s book falls into this category, but less than 5% is actually used as a true revolving line, according to the management. Loan against securities and channel financing contribute 95% to the flexi exposure, which will be harder to transition to term loans. Still, 80% of customers do not have access to similar facilities from banks, and the management expects the regulations to evolve materially from the current draft.
Macro risks can derail the promising trends in asset-quality and growth seen so far. Sustained high crude prices could hurt SME and CV borrowers, possibly requiring higher provisioning. Q1FY27 saw gross non-performing assets (NPA) narrowing for the third straight quarter to 1.9%, with net NPA under 1%. A 25% year-on-year decline in provisioning helped drive a 56% increase in net profit to ₹1,628 crore, well ahead of the 23% growth in net income.
But at 2.4x estimated FY28 book value, Systematix expects its 32% valuation discount to its closest peer to narrow, driven by a stronger growth trajectory and multiple levers to improve return on assets (ROA), including an evolving business mix.