Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the bank facilities and debt instrument of the Tata Capital Limited (TCL) at 'CRISIL AAA/Stable/CRISIL A1+’.

 

Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs 125 crore in line with its withdrawal policy (See Annexure 'Details of rating withdrawn' for details). CRISIL Ratings has received independent confirmation that these instruments are fully redeemed.

 

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Tata Capital Limited and its subsidiaries TCHFL, Tata Capital Financial Services Limited (TCFSL), Tata Cleantech Capital Limited (TCCL), Tata Securities Ltd and Tata Capital Pte Ltd, Singapore), all together referred to as Tata Capital Limited (TCL) group.

 

CRISIL Ratings notes that on March 28, 2023, the board of TCCL approved a scheme of arrangement involving merger of TCFSL and TCCL with the parent company TCL. TCL would then be registered as NBFC-ICC (Investment and Credit Company) instead of NBFC-CIC (Core Investment Company). TCHFL shall continue to operate as an HFC and will be a subsidiary of the merged entity. The merger is subject to requisite regulatory approvals.

 

CRISIL Ratings understands that the merger is a part of the group’s broader plans to meet the revised regulatory framework for its subsidiary, TCFSL identified as an Upper Layer NBFC, pursuant to RBI’s scale-based regulations. The merger would further enable simplified organizational structure and improve operational and management efficiencies. Since CRISIL Ratings follows a consolidated analytical approach at TCL group level for evaluating credit profiles of TCL, TCFSL, TCHFL and TCCL, the proposed merger is unlikely to impact the ratings of the group. CRISIL Ratings shall monitor further developments on the above transaction and its impact on the group’s overall business profile.

 

Ratings for TCL group is driven by increased strategic importance of the financial services business to Tata Sons Private Limited (Tata Sons; rated 'CRISIL AAA/Stable/CRISIL A1+'). This is in line with the Tata group's focus on domestic consumption as a key theme in their growth philosophy. The TCL group, as the principal vehicle for non-captive lending, plays a key role through which this strategy will be implemented.

 

The rating also factors in the strong support by the parent Tata Sons demonstrated by articulation of its intention to (i) to maintain majority shareholding in the TCL group, (ii) to assist TCL group in organizing for any shortfall in maintaining capital adequacy as per applicable regulations and (iii) to conduct the business of TCL group in a manner that would enable TCL group to perform its obligations to all lenders and debt holders in full and timely manner.

Tata Capital Limited, through its lending entities operates in diversified retail and corporate segments, wherein some segments may witness challenges with income streams being affected by the lockdown. On a consolidated basis, TCL group's gross non-performing assets (NPAs) and net NPAs improved to 1.9% and 0.6% respectively as on September 30, 2022 (1.9% and 0.6% as on March 31, 2022) from 2.5% and 0.9% respectively as on March 31, 2021. In addition, standard restructured loans account for 2.5% of consolidated AUM as on September 30, 2022. The collection efficiencies were impacted during first and second waves of Covid-19 pandemic but have improved back to the normal level since June 2021. However, the impact on the asset quality, especially in riskier segments such as unsecured lending and the wholesale lending remains a key monitorable.

 

Tata Sons has infused of Rs 6,300 crore in Tata Capital since inception of which Rs 1,000 crore was infused in fiscal 2020 and Rs 2,500 crore was in fiscal 2019. This equity capital infusion is a strong indicator of the focus on the lending business.

 

TCL group's business performance has also improved, with significant scale-up and diversification in its portfolio over the past few years. Asset quality and earnings are also on an improving trend, with the group discontinuing businesses, which have posed asset quality challenges in recent years. The TCL group is also further strengthening its risk function- both in people and in processes, which should hold it in good stead. Capital position will remain comfortable, with continued capital infusion from Tata Sons.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of TCL and its subsidiaries TCHFL, TCFSL, TCCL, Tata Securities Ltd and Tata Capital Pte Ltd, Singapore. This is because they have significant operational and management linkages and operate under the common Tata Capital brand. The ratings also factor in strong support from TCL’s parent, Tata Sons given the strategic importance of TCL and its subsidiaries as the principal vehicle of non-captive lending in the group and the Tata Sons’ strong articulation of support.

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Strategic importance to, and expectation of strong support from the ultimate parent, Tata Sons

CRISIL's ratings on debt instruments of 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 owns 94.55% of TCL's equity shares and most of the remaining stake is held by the other Tata group companies and trusts. TCL in turn holds 100% stake in its two main subsidiaries- TCFSL and TCHFL. Tata Sons also has personnel from its senior management on TCL's board. Tata Sons has infused of Rs 6,300 crore in Tata Capital since inception of which Rs 1,000 crore was infused in fiscal 2020 and Rs 2,500 crore was in fiscal 2019  indicating the intent of the group to step up its focus on the lending business.

 

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. 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 are set to 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 capitalization to support medium term growth plans, supported by regular infusion from parent

TCL group has comfortable capitalization, with consolidated networth (including Compulsorily Convertible Preference Shares and minority interest) of Rs 13,946 crore as on March 31, 2022 as compared to consolidated networth of Rs 11,966 crore as on March 31, 2021. The group companies TCFSL, TCHFL and TCCL remain adequately capitalised and the TCL Group has been supported by regular infusion from its parent to support growth. The combined networth stood at Rs 14,194 crore as on September 30, 2022.  Thereafter, TCL has raised equity of Rs 593.8 crore during March 2023 through rights issue.

 

As on September 30, 2022, the networth of TCFSL was Rs 8,450 crore and gearing was 6.2 times (Rs 7,763 crore and 6.3 times as on March 31, 2022). Thereafter, TCL infused funds of Rs 1150 crore in form of equity shares into TCFSL during second half of fiscal 2023. The capital adequacy of TCFSL was comfortable with tier-1 capital level of 12.1% and total capital ratio of 17.1% as on September 30, 2022.

 

For TCHFL, as on September 30, 2022, the networth was Rs 3,938 crore and gearing was 7.6 times (Rs 3,567 crore and gearing was 7.6 times as on March 31, 2022). Thereafter, TCL infused funds of Rs 500 crore in form of equity shares into TCHFL in March 2023. The capital adequacy of TCHFL was comfortable with tier-1 capital level of 14.8% and total capital ratio of 18.6% as on September 30, 2022.

 

For TCCL, the networth was Rs 1,805 crore and the gearing was 4.6 times as on September 30, 2022 (Rs 1,677 crore and the gearing was 4.0 times as on March 31, 2022). The tier-1 capital and total capital ratio of TCCL was 16.8% and 22.1% as on September 30, 2022.

 

TCL’s consolidated gearing stood at 6.1 times as on March 31, 2022 as compared to consolidated gearing at 5.7 times as on March 31, 2021. CRISIL Ratings believes that TCL group is adequately capitalized to absorb asset-side risks. CRISIL Ratings also believes that despite its significant growth plans, TCL group's capitalization is expected to remain comfortable, given Tata Sons' commitment 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 non-convertible debentures, bank borrowings, and short-term debt. As on September 30, 2022, overall market borrowings stood at about 52% of total borrowings. TCL and its subsidiaries have the ability to mobilize debt at competitive costs, given their association with the Tata group. The overall quantum of resources raised in fiscal 2022 and first half of fiscal 2023 were Rs 107,781 crore (includes CP raised for IPO financing) and Rs 31,085 crore respectively.

 

Weaknesses:

• Average asset quality, albeit on improving trend

On a consolidated basis, TCL group's gross non-performing assets (NPAs) and net NPAs improved to 1.9% and 0.6% respectively as on September 30, 2022 (1.9% and 0.6% respectively as on March 31, 2022) from 2.5% and 0.9 respectively as on March 31, 2021. The provision coverage ratio stood at 67% as on September 30, 2022 (71% as on March 31, 2022).

 

In case of TCFSL, the gross stage-3 improved to 2.1% as on September 30, 2022 (2.2% as on March 31, 2022) from 3.0% as on March 31, 2021. The company's provision coverage ratio for stage-3 assets was 78% as on September 30, 2022 thereby translating into net NPA to 0.5%. Additionally, restructuring in TCFSL was 2% (Rs 1,232 crore) of the portfolio as on September 30, 2022.

 

TCHFL's reported stage-3 improved to 1.6% as on September 30, 2022 (1.6% as on March 31, 2022) from 2.1% as on March 31, 2021. The provision coverage ratio stood at 50% as on September 30, 2022 leading to net NPA of 0.8%. Additionally, restructuring in TCHFL was 4% (Rs 1,369 crore) of the portfolio as on September 30, 2022.

 

TCCL had stage-3 assets ratio of 1.5% and net NPA ratio of 1.1% as on September 30, 2022 as compared to 0.9% and 0.5% respectively as on March 31, 2022 (1.0% and 0.6% respectively as on March 31, 2021). The provisioning coverage ratio of TCCL was 26% as on September 30, 2022.

 

All the Tata Capital group companies have put necessary systems in place for recognition of asset quality metrics as per the new norms of November 2021. However, the impact on the asset quality, especially in riskier segments such as unsecured lending and the wholesale lending remains a key monitorable.

 

• Moderate earnings profile

TCL group’s profitability has depicted improvement over last few years. TCL’s consolidated PAT grew by 45% to Rs 1,801 crore in fiscal 2022 from Rs 1,245 crore reported for fiscal 2021, driven by lower credit costs as well as lower cost of funding. Total provisioning expense for fiscal 2022 amounted to Rs 1,081 crore as compared to Rs 1,398 crore in fiscal 2021, with a healthy provision coverage ratio of 71% (65% as on March 31, 2021). TCL reported a consolidated PAT of Rs 1,205 crore and ROTA of 2.5% (annualised) for the first half of fiscal 2023.

 

TCFSL reported an increase in PAT to Rs 817 crore on a total income (net of interest expense) of Rs 3,454 crore in fiscal 2022 from PAT of Rs 677 crore on a total income (net of interest expense) of Rs 3,096 crore in fiscal 2021. The return on assets stood stable at 1.5% in fiscal 2022 as compared to 1.4% in fiscal 2021. The provisioning expense for fiscal 2022 amounted to Rs 890 crore as compared to Rs 1,013 crore for fiscal 2021. For the first half of fiscal 2023, TCFSL reported PAT and ROTA of Rs 713 crore and 2.3% (annualised) respectively.

 

TCHFL reported an increase in PAT to Rs 569 crore on a total income (net of interest expense) of Rs 1,325 crore in fiscal 2022 from PAT of Rs 355 crore on a total income (net of interest expense) of Rs 1,130 crore in fiscal 2021. The return on assets improved to 1.9% in fiscal 2022 from 1.2% in fiscal 2021. The provisioning expense for fiscal 2022 amounted to Rs 163 crore as compared to Rs 357 crore for fiscal 2021. For the first half of fiscal 2023, TCFSL reported PAT and ROTA of Rs 388 crore and 2.3% (annualised) respectively.

 

TCCL reported an increase in PAT to Rs 204 crore on a total income (net of interest expense) of Rs 352 crore in fiscal 2022 from PAT of Rs 168 crore on a total income (net of interest expense) of Rs 290 crore in fiscal 2021. The return on assets stood healthy at 2.7% in fiscal 2022 (2.6% in fiscal 2021). For the first half of fiscal 2023, TCCL reported PAT and ROTA of Rs 130 crore and 2.8% (annualised) respectively.

 

CRISIL Ratings estimates that given a healthy provision coverage ratio, the incremental stress in the current loan portfolio from Covid-19 would be limited. However, the performance of the restructured portfolio of the group and its impact on profitability and credit cost remains monitorable.

Liquidity: Superior

TCL’s consolidated Asset Liability Management (ALM) as on March 31, 2022 shows no cumulative negative mismatches upto 1 year maturity bucket (the inflows include existing committed bank lines).

 

In terms of liquidity, as on December 31, 2022, TCL Group had total liquid balances of Rs 12,706 crore (cash equivalents and liquid investments of Rs 6,021 crore and unutilised working capital bank lines of Rs 6,685 crore). Additionally, it also had available undrawn term loans of ~Rs 5,346 crore as on December 31, 2022. The external debt repayment cover of TCL Group for two months was 1.3 times and TCL Group had external debt repayments of Rs 9,617 crore over the next two months ending February 28, 2023.

Outlook: Stable

CRISIL Ratings believes that TCL group will remain highly strategically important to Tata Sons, and continue to benefit from the strong parent support over the medium term. The outlook may be revised to ‘Negative’ in case of a decline in Tata Sons’ credit quality or in CRISIL Ratings’ view, a diminution in expected support to TCL group. The outlook may also be revised to ‘Negative’ in case of significant pressure on the TCL group’s asset quality, impacting the group’s earnings

Rating Sensitivity factors

Downward factors

• Downward revision in the credit rating of Tata Sons Private Limited (Tata Sons)
• Any change in the support philosophy of Tata Sons resulting in reduced support to Tata Capital Group
• Sharp deterioration in consolidated asset quality with consolidated gross NPA remaining above 6% and in-turn impacting capital and earnings.

About the Company

TCL is the holding company for the financial services businesses of the Tata Capital group and is registered with the Reserve Bank of India as a systemically important, non-deposit-taking, Core Investment Company. Tata Capital has a diversified product portfolio with a presence in both the wholesale and retail finance segments. It had sizeable AUM of Rs 103,518 crore as on September 30, 2022 as compared to Rs 94,349 crore as on March 31, 2022 (Rs 77,219 crore as on March 31, 2021). The fund-based products and services are primarily offered by TCFSL (both wholesale and retail finance segments), TCHFL (mortgage finance), and TCCL (infrastructure finance). The fee-based services distribution of mutual funds and insurance products, stock broking, and investment banking are offered through the wholly owned subsidiary, Tata Securities Ltd.

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of the instrument	Date of issuance	Coupon rate (%)	Maturity Date	Complexity of instrument	Issue Size  (Rs.Crore)	Rating assigned along with Outlook
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	45	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference Shares*	NA	NA	NA	Complex	40	CRISIL AAA/Stable
NA	Preference shares*	NA	NA	NA	Complex	6.8	CRISIL AAA/Stable
INE976I04317	Preference Shares	13-Mar-19	7.75%	12-Mar-26	Complex	40	CRISIL AAA/Stable
INE976I04309	Preference shares	15-Jun-18	7.10%	14-Jun-25	Complex	33.45	CRISIL AAA/Stable
INE976I04283	Preference shares	20-Apr-18	7.10%	19-Apr-25	Complex	40	CRISIL AAA/Stable
INE976I04291	Preference shares	10-May-18	7.10%	9-May-25	Complex	40	CRISIL AAA/Stable
INE976I04234	Preference shares	26-Jul-17	7.50%	25-Jul-24	Complex	75	CRISIL AAA/Stable
INE976I04242	Preference shares	28-Jul-17	7.33%	27-Jul-24	Complex	75	CRISIL AAA/Stable
INE976I04259	Preference shares	4-Aug-17	7.33%	3-Aug-24	Complex	75	CRISIL AAA/Stable
INE976I04267	Preference shares	15-Sep-17	7.15%	14-Sep-24	Complex	75	CRISIL AAA/Stable
INE976I04275	Preference shares	29-Sep-17	7.10%	28-Sep-24	Complex	75	CRISIL AAA/Stable
INE976I04168	Preference shares	02-Sep-16	7.50%	1-Sep-23	Complex	75	CRISIL AAA/Stable
INE976I04176	Preference shares	16-Sep-16	7.50%	15-Sep-23	Complex	100	CRISIL AAA/Stable
INE976I04184	Preference shares	07-Oct-16	7.50%	6-Oct-23	Complex	50	CRISIL AAA/Stable
INE976I04192	Preference shares	27-Oct-16	7.50%	26-Oct-23	Complex	75	CRISIL AAA/Stable
INE976I04200	Preference shares	10-Mar-17	7.50%	9-Mar-24	Complex	135	CRISIL AAA/Stable
INE976I04218	Preference shares	07-Jul-17	7.50%	6-Jul-24	Complex	65	CRISIL AAA/Stable
INE976I04226	Preference shares	12-Jul-17	7.50%	11-Jul-24	Complex	75	CRISIL AAA/Stable
INE976I04325	Preference shares	12-Jun-19	7.50%	11-Jun-26	Complex	40	CRISIL AAA/Stable
INE976I04333	Preference shares	28-Jun-19	7.50%	27-Jun-26	Complex	40	CRISIL AAA/Stable
INE976I08383	Debentures	18-Jan-22	6.49%	16-Feb-24	Simple	400	CRISIL AAA/Stable
INE976I08391	Debentures	22-Feb-22	6.70%	28-Mar-25	Simple	300	CRISIL AAA/Stable
NA	Debentures*	NA	NA	NA	Simple	20	CRISIL AAA/Stable
NA	Debentures*	NA	NA	NA	Simple	1000	CRISIL AAA/Stable
INE976I08318	Debentures	7-Feb-20	8.38	28-Jun-23	Simple	125	CRISIL AAA/Stable
INE976I08342	Debentures	4-Aug-20	7.22	4-Aug-25	Simple	205	CRISIL AAA/Stable
INE976I08359	Debentures	4-Aug-20	6.7	4-Aug-23	Simple	300	CRISIL AAA/Stable
INE976I08367	Debentures	25-Feb-21	6.7899	28-Dec-23	Simple	300	CRISIL AAA/Stable
INE976I08375	Debentures	25-Feb-21	6.7942	30-Apr-24	Simple	400	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	7-365 days	Simple	3000	CRISIL A1+
NA	Cash Credit and Working Capital demand loan	NA	NA	NA	NA	15	CRISIL AAA/Stable
NA	Proposed Long-Term Bank Loan Facility	NA	NA	NA	NA	10	CRISIL AAA/Stable

*yet to be issued

 

Annexure - Details of Rating Withdrawn

ISIN	Instrument	Date of issuance	Coupon rate (%)	Maturity Date	Complexity of instrument	Issue Size
INE976I08326	Debentures	7-Feb-20	8.33	13-Mar-23	Simple	125

 

Annexure – List of entities consolidated

Names of Entities Consolidated	Extent of Consolidation	Rationale for Consolidation
Tata Capital Limited	Full	Holding Company
Tata Capital Financial Services Limited	Full	Subsidiary
Tata Capital Housing Finance Limited	Full	Subsidiary
Tata Cleantech Capital Limited	Full	Subsidiary
Tata Securities Limited	Full	Subsidiary
Tata Capital Pte Ltd, Singapore and its subsidiaries	Full	Subsidiary