Synopsis: JM Financial has initiated coverage on Tata Capital with an ‘Add’ rating and a target price of Rs 360, citing steady growth potential post its merger with Tata Motors Finance. Despite temporary pressure on profitability, the firm expects a strong rebound driven by branch expansion, diversified lending, and improved asset quality by FY27.
Tata Capital, the diversified NBFC under the Tata Group, has received an ‘Add’ rating from JM Financial with a target price of Rs 360, implying around a 10% upside from current levels. The firm values Tata Capital at 2.9x FY27E Price-to-Book Value (P/BV), positioning it between its peers HDB Financial and Cholamandalam Investment and Finance Company (CIFC).
Founded in 2007, Tata Capital has emerged as a major player in the Indian NBFC space, maintaining around 80% of its loan book in secured segments. Retail finance forms 61% of its portfolio, while SME and corporate loans account for 26% and 13%, respectively.
Impact of Merger on Profitability
The merger with Tata Motors Finance (TMFL) in FY25 temporarily dampened Tata Capital’s financial performance. Its Return on Assets (RoA) dropped to 1.6%, and Return on Equity (RoE) to 13%, compared to the FY23-24 averages of 2.3% and 18%, respectively. JM Financial attributes this to operational integration challenges and elevated credit costs, particularly in MSME and personal loan segments.
However, the brokerage expects a turnaround as integration synergies kick in and non-captive lending expands. It forecasts AUM and PAT CAGRs of 20% and 34%, respectively, over FY25-27, supported by branch expansion and improved cost efficiency.
Growth Drivers Ahead
Post-merger, Tata Capital has significantly expanded its branch footprint—adding 353 new branches and taking its total to 1,516 as of Q1FY26. This network growth is expected to boost cross-selling, enhance operating leverage, and bring down the cost-to-income ratio from 42% in FY25 to 39% by FY27.
With a AAA/Stable credit rating, Tata Capital benefits from low-cost funding access, although its Net Interest Margins (NIMs) remain modest at 5–5.5%, slightly below peers due to its secured lending mix and bank competition.
JM Financial expects these margins to improve gradually as credit costs ease from the second half of FY26 and lending mix diversification continues.
Peer Comparison and Valuation
Tata Capital’s IPO upper price band of Rs 326 values it at 2.7x FY27E P/BV. JM Financial suggests that Tata Capital should trade at a 10–12% premium or discount to peers — between HDB Financial (2.5x) and CIFC (3.7x).
“While the upside appears limited in the near term, Tata Capital’s steady AUM growth and consistent RoE make it a solid long-term player in the NBFC space,” JM Financial stated.
Risks to Outlook
Potential risks include economic slowdown, higher credit costs, delayed NIM recovery, and regulatory headwinds that could weigh on near-term performance. Nonetheless, Tata Capital’s diversified portfolio and strong group backing offer resilience against cyclical challenges.
Disclaimer: This article is for informational purposes only and should not be construed as investment advice. Readers are encouraged to conduct their own research or consult a financial advisor before making investment decisions.
