Detailed Rationale

CRISIL Ratings has assigned its 'CRISIL AAA/Stable' rating to Rs.2,000 crore non-convertible debentures of Tata Capital Limited (TCL) and has reaffirmed its ratings on the company's bank facilities and other debt instruments at 'CRISIL AAA/Stable/CRISIL A1+’.

 

Consequent to redemption, CRISIL Ratings has withdrawn its rating on debentures of Rs 425 crore in line with its withdrawal policy (See Annexure 'Details of rating withdrawn' for details).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 TCFSL, Tata Capital Housing Finance Limited (TCHFL), Tata Cleantech Capital Limited (TCCL), Tata Securities Ltd and Tata Capital Pte Ltd, Singapore), all together referred to as Tata Capital Limited (TCL) group.

 

On March 28, 2023, the board of TCL had approved a scheme of arrangement involving merger of TCFSL and TCCL with the parent company TCL. TCHFL shall continue to operate as an HFC and will be a subsidiary of the merged entity. CRISIL Ratings notes that the group has received ‘No Objection’ for the scheme from the Reserve Bank of India (RBI), Competition Commission of India (CCI) and stock exchanges. Based on National Company Law Board NCLT’s instruction, shareholders’ meeting is likely to be held in September 2023 and expected to be consummated by the end of the current fiscal subject to all the 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.

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

The 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 net worth (including minority interest) of Rs 18,149 crore as on March 31, 2023 as compared to consolidated net worth of Rs 12,836 crore as on March 31, 2022. 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. TCL raised equity capital of Rs 593.8 crore during March 2023 through rights issue.

 

As on March 31, 2023, the net worth of TCFSL was Rs 10,258 crore and gearing was 6.4 times (Rs 7,763 crore and 6.3 times as on March 31, 2022). TCL had 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 13.0% and total capital ratio of 17.3% as on March 31, 2023.

 

For TCHFL, as on March 31, 2023, the net worth was Rs 4,864 crore and gearing was 7.2 times (Rs 3,567 crore and gearing was 7.6 times as on March 31, 2022). TCL had 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 15.0% and total capital ratio of 18.2% as on March 31, 2023.

 

For TCCL, the networth was Rs 1,957 crore and the gearing was 4.7 times as on March 31, 2023 (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 16.1% and 21.0% as on March 31, 2023.

 

TCL’s consolidated gearing stood at 6.2 times as on March 31, 2023 as compared to consolidated gearing at 6.7 times as on March 31, 2022. 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. The borrowing mix of TCL (consolidated basis) as on March 31, 2023 was composed of NCDs (43% share), term loans (39% share), working capital loans (5% share), commercial papers (8% share) and external commercial borrowing (5% share). 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 2023 was Rs 81,310 crore.

 

Comfortable asset quality metrics

The asset quality metrics for the group have improved with consolidated Gross Stage 3 (GS3) ratio at 1.7% as on March 31, 2023 from a peak of 2.5% as on March 31, 2021. This is similar to the pre-Covid levels. Even on a 1 year lagged basis, the GS3 ratio has improved to 2.2% as on March 31, 2023 from 2.5% as on March 31, 2021. The overall standard restructured book stood at less than 2% of the portfolio as on March 31, 2023.

 

TCFSL’s GS3 ratio improved to 2.0% as on March 31, 2023 from 2.2% as on March 31, 2022. The company's provision coverage ratio (PCR) for stage 3 assets was 85% as on March 31, 2023 thereby translating into Net Stage 3 (NS3) ratio of 0.3%. Additionally, standard restructured book in TCFSL was 1.4% (Rs 968 crore) of the portfolio as on March 31, 2023.

 

TCHFL's reported GS3 ratio of 1.5% as on March 31, 2023 (1.6% as on March 31, 2022). The PCR stood at 60% as on March 31, 2023 translating to NS3 ratio of 0.6%. Additionally, standard restructured book in TCHFL was 3% (Rs 1,168 crore) of the portfolio as on March 31, 2023.

 

TCCL‘s reported GS3 and NS3 ratios improved to 0.5% and 0.2% respectively as on March 31, 2023 from to 0.8% and 0.5% respectively as on March 31, 2022. The PCR of TCCL stood at 65% as on March 31, 2023.

 

The overall credit costs (as a proportion of average total assets) on a consolidated basis have also improved to 0.5% for fiscal 2023 (1.2% for fiscal 2022 and 1.7% for fiscal 2021). Going forward, the credit costs are expected to be controlled given the increased provision coverage ratio at 77% as on March 31, 2023 (65% as on March 31, 2021).

 

All the Tata Capital group companies have put necessary systems in place for recognition of asset quality metrics as per the revised norms of RBI Circular issued in November 2021. However, the group’s ability to contain the slippages and maintain its asset quality metrics as the portfolio continues to scale is a key monitorable.

 

Weaknesses:

Moderate earnings profile

TCL group’s profitability has depicted improvement over last few years. TCL’s consolidated PAT grew by 64% to Rs 2,946 crore in fiscal 2023 from Rs 1,801 crore reported for fiscal 2022, driven by lower credit costs and supported by net gain on derecognition of associates amounting to Rs 815 crore. The Return on Assets (ROA) improved to 2.5% for fiscal 2023 from 1.9% for fiscal 2022. Total provisioning expense for fiscal 2023 amounted to Rs 574 crore as compared to Rs 1,081 crore in fiscal 2022, with a healthy provision coverage ratio of 77% (71% as on March 31, 2022).

 

TCFSL reported an increase in PAT to Rs 1,382 crore on a total income (net of interest expense) of Rs 4,184 crore in fiscal 2022 from PAT of Rs 817 crore on a total income (net of interest expense) of Rs 3,507 crore in fiscal 2022. The ROA improved to 2.0% in fiscal 2023 as compared to 1.5% in fiscal 2022. The provisioning expense for fiscal 2023 amounted to Rs 504 crore as compared to Rs 890 crore for fiscal 2022.

 

TCHFL reported an increase in PAT to Rs 821 crore on a total income (net of interest expense) of Rs 1,767 crore in fiscal 2022 from PAT of Rs 569 crore on a total income (net of interest expense) of Rs 1,331 crore in fiscal 2022. The return on assets improved to 2.3% in fiscal 2023 from 2.0% in fiscal 2022. The provisioning expense for fiscal 2023 amounted to Rs 32 crore as compared to Rs 163 crore for fiscal 2022.

 

TCCL reported an increase in PAT to Rs 279 crore on a total income (net of interest expense) of Rs 480 crore in fiscal 2023 from PAT of Rs 204 crore on a total income (net of interest expense) of Rs 352 crore in fiscal 2021. The ROA stood healthy at 2.7% in fiscal 2023 (2.6% in fiscal 2022).

 

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 June 30, 2023, TCL Group had total liquid balances of Rs 14,128 crore (cash equivalents and liquid investments of Rs 3,313 crore and unutilised working capital bank lines of Rs 10,815 crore), equivalent to next two months external debt obligations till August 2023 which amounted to Rs 13,927 crore. Additionally, it also had available undrawn term loans of ~Rs 2,580 crore as on June 30, 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 127,662 crore as on June 30, 2023 (Rs 119,950 crore as on March 31, 2023, Rs 94,349 crore as on March 31, 2022). 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