Rating Rationale

Key Rating Drivers & Detailed Description

Strengths:

Strategic importance to, and expectation of strong support from the ultimate parent, Tata Sons: The ratings on the debt instruments of the TCL group continue to be based on the expectation of strong support that the group is expected to receive from the ultimate parent, Tata Sons. This is due to Tata Sons’ majority ownership in the TCL group, coupled with the increasing importance of the financial services business to the Tata group.

Tata Sons directly owned 92.83% of TCL's equity shares and while most of the remaining stake was held by the other Tata group companies and trusts as on September 30, 2024. TCL, in turn, holds 100% stake in TCHFL. Tata Sons also has personnel from its senior management on TCL's board. Tata Sons has infused capital of Rs 6,097 crore in TCL in the last five fiscals, of which Rs 2,500 crore was infused in fiscal 2019, Rs 1,000 crore in fiscal 2020, Rs 594 crore in fiscal 2023 and Rs 2003 crore during fiscal 2024, indicating the intent of the group to step up its focus on the lending business.

The TCL group, as the Tata group’s non-captive lending vehicle, is the primary financial services arm, and remains critical to the group, given the growth opportunities in this sector over the medium to long term. The TCL group is also strategically important to the Tata group because it caters to the funding requirements of various entities associated with the group, such as its suppliers, vendors, and dealers. The shared brand and infrastructural synergies with various Tata group companies strengthen the integration of the TCL group with the overall Tata group. Business synergies should increase further as TCL taps into the Tata group ecosystem as part of its growth strategy. Crisil Ratings believes that Tata Sons will continue to have majority ownership in, and management control of TCL and its subsidiaries, over the medium term.

Comfortable capitalisation to support medium term growth plans: TCL group has comfortable capitalisation, with consolidated net worth (including minority interest) of Rs 25,335 crore as on September 30,2024 against Rs 23,417 crore as on March 31, 2024. Group’s capitalisation has been supported by regular infusion from its parent to support growth and the same is expected going forward too.

For TCHFL, as on September 30, 2024, net worth was Rs 7446 crore and gearing stood at 7.2 times (Rs 6,711 crore and 7.3 times as on March 31, 2024). The Capital adequacy of TCHFL was comfortable with tier-1 capital level of 15.73% and overall capital ratio of 18.28% as on September 30, 2024 (15.8% and 18.8% respectively as on March 31, 2024).

The consolidated gearing was 6.4 times as on September 30, 2024 (6.3 times as on March 31, 2024 and 6.2 times as on March 31, 2023). Crisil Ratings believes that TCL group is adequately capitalised to absorb asset-side risks. Crisil Ratings also believes that despite its significant growth plans, TCL group's capitalisation is expected to remain comfortable, given the commitment by Tata Sons to support growth in the financial services business.

Diversified resource profile: TCL group also has access to funding from a diverse base of lenders; the funding profile is balanced with a mix of NCDs, bank borrowings, and short-term debt. The borrowing mix of TCL (consolidated basis) as on September 30, 2024, comprised NCDs (38% share), term loans (38% share), working capital loans (5% share), commercial papers (5% share) and external commercial borrowing (13% share). TCL and its subsidiaries can mobilise debt at competitive costs due to their association with the Tata group.

Comfortable asset quality metrics: The asset quality metrics have improved marginally, with consolidated Gross Stage III (GSIII) ratio of 1.5% as of September 30, 2024 against 1.5% as on March 31, 2024 (1.7% as on March 31, 2023). The provision coverage ratio at a consolidated level stood at 70%, translating into net stage III ratio of 0.5% as on September 30, 2024 against 0.4% as on March 31, 2024. The overall standard restructured book stood at less than 0.52% of the portfolio as on September 30, 2024. . As on September 30, 2024, standalone GSIII of TCL was 1.9% and NSIII was 0.5% (1.71% and 0.4% as on March 31, 2024).

TCHFL reported improved GSIII ratio of 0.8% as on September 30, 2024, against 1.0% as on March 31, 2024. The Provision Coverage Ratio for TCHFL stood at 57% as on September 30, 2024, against 58% as on March 31, 2024, translating to Net Stage III ratio of 0.4% and 0.40%. Additionally, standard restructured book in TCHFL was 1.57% (Rs 923 crore) of the portfolio as on September 30, 2024. Performance of the same will be monitorable.

While asset quality has improved, however, the group’s ability to contain the slippages and maintain its asset quality metrics as the portfolio continues to scale remains a key monitorable.

Weakness:

Improving earnings profile: TCL’ consolidated Profit after tax (PAT) grew 13% to Rs 3,327 crore in fiscal 2024 from Rs 2,946 crore for fiscal 2023 (includes one-time item of Rs 729 crore). Excluding one-time item in fiscal 2023, PAT grew by 50% in fiscal 2024 and return on average assets (ROA) stood at 2.1% for fiscal 2024 as against 1.9% for fiscal 2023. TCL reported consolidated profit of Rs 1893 crore in the first half of fiscal 2025.

The overall credit costs (as a proportion of average total assets) on a consolidated basis was 0.7% for first half of fiscal 2025 against 0.4% for fiscal 2024 from 0.5% in fiscal 2023 and 1.2% in fiscal 2022. Going forward, with expectation of improvement in asset quality and healthy provisioning levels, credit costs are expected to remain controlled.

TCHFL reported standalone PAT of Rs 733 crore in first half of fiscal 2025 against Rs 1148 crore in fiscal 2024. RoMA was 2.5% and 2.4% respectively in first half of fiscal 2025 and fiscal 2024. The group’s ability to maintain healthy profitability while controlling credit costs will remain monitorable.