Detailed Rationale

CRISIL Ratings has reaffirmed its ratings on the debt instruments and bank facilities of Tata Cleantech Capital Limited (TCCL) at 'CRISIL AAA/CRISIL PPMLD AAA/CRISIL AA+/Stable/CRISIL A1+’.

 

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Tata Capital Limited and its subsidiaries TCCL, Tata Capital Financial Services Limited (TCFSL), Tata Capital Housing Finance Limited (TCHFL), 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.

 

The prefix 'PPMLD' indicates that the principal amount of the debentures is protected, while returns remain market-linked. Also, payments to investors are not fixed and are linked to external variables such as government yield, commodity prices, equity indices, foreign exchange rates, or equity valuation of the company.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of TCL and its subsidiaries TCFSL, TCHFL, 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 net worth (including Compulsorily Convertible Preference Shares and minority interest) of Rs 13,946 crore as on March 31, 2022 as compared to consolidated net worth 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 net worth 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 net worth 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 net worth 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

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

Incorporated in September 2011, TCCL is a joint venture between TCL and IFC. TCL and IFC have 80.5% and 19.5% shareholding, respectively, in TCCL. TCCL is focused on financing clean technology projects. The company offers a wide range of financial solutions and advisory services to businesses and enterprises operating in the areas of renewable energy, energy efficiency, and water management. TCCL was classified as an Infrastructure Finance Company by the RBI in October 2015.

 

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 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 Instrument	Date of issuance	Coupon rate (%)	Maturity Date	Issue size (Rs.Cr)	Complexity of instrument	Rating assigned with Outlook
NA	Subordinated Debt*	NA	NA	NA	350	Complex	CRISIL AAA/Stable
INE857Q08016	Subordinated debt	10-May-19	9.18	10-May-29	150	Complex	CRISIL AAA/Stable
INE857Q08032	Subordinated debt	28-Jul-20	7.75%	26-Jul-30	150	Complex	CRISIL AAA/Stable
INE857Q08024	Subordinated debt	13-Nov-19	8.80%	13-Nov-29	200	Complex	CRISIL AAA/Stable
NA	Perpetual Bonds*	NA	NA	NA	250	Highly complex	CRISIL AA+/Stable
NA	Long Term Principal Protected Market Linked Debentures*	NA	NA	NA	372.56	Highly complex	CRISIL PPMLD AAA/Stable
INE857Q07299	Long Term Principal Protected Market Linked Debentures	20-Jul-20	10 YEAR G-SEC LINKED	20-Jul-23	75	Highly Complex	CRISIL PPMLD AAA/Stable
INE857Q07364	Long Term Principal Protected Market Linked Debentures	12-Jul-22	G-SEC LINKED	25-Jun-24	229.6	Highly Complex	CRISIL PPMLD AAA/Stable
INE857Q07380	Long Term Principal Protected Market Linked Debentures	30-Nov-22	G-SEC LINKED	30-May-25	211.0	Highly Complex	CRISIL PPMLD AAA/Stable
INE857Q07398	Long Term Principal Protected Market Linked Debentures	26-Dec-22	G-SEC LINKED	28-Jul-25	50.0	Highly Complex	CRISIL PPMLD AAA/Stable
NA	Debentures*	NA	NA	NA	655	Simple	CRISIL AAA/Stable
INE857Q07240	Debentures	16-Oct-19	8.65%	16-Oct-29	60	Simple	CRISIL AAA/Stable
INE857Q07232	Debentures	15-Jul-19	0.0875	13-Jul-29	140	Simple	CRISIL AAA/Stable
NA	Debentures*#	NA	NA	NA	260	Simple	CRISIL AAA/Stable
INE857Q07141	Debentures	2-Jun-17	8.11%	3-Jun-24	10	Simple	CRISIL AAA/Stable
INE857Q07216	Debentures	18-Dec-18	8.74%	18-Dec-23	180	Simple	CRISIL AAA/Stable
INE857Q07257	Debentures	5-Dec-19	8.35%	5-Dec-24	25	Simple	CRISIL AAA/Stable
INE857Q07273	Debentures	10-Jun-20	8%	10-Sep-27	175	Simple	CRISIL AAA/Stable
INE857Q07315	Debentures	31-Dec-20	5.40%	30-Nov-23	200	Simple	CRISIL AAA/Stable
INE857Q07323	Debentures	19-May-21	3M TBILL LINKED	19-May-23	200	Simple	CRISIL AAA/Stable
INE857Q07331	Debentures	28-Jul-21	3M TBILL LINKED	26-Jul-24	360	Simple	CRISIL AAA/Stable
INE857Q07349	Debentures	17-Nov-21	5.95%	15-Nov-24	300	Simple	CRISIL AAA/Stable
INE857Q07356	Debentures	21-Jun-22	7.62%	20-Jun-25	50	Simple	CRISIL AAA/Stable
INE857Q07372	Debentures	18-Oct-22	7.50%	16-Oct-25	1000	Simple	CRISIL AAA/Stable
INE857Q07406	Debentures	23-Mar-23	7.552%	23-Mar-26	375	Simple	CRISIL AAA/Stable
NA	Commercial Paper	NA	NA	7-365 days	2000	Simple	CRISIL A1+
NA	Cash Credit & Working Capital demand loan	NA	NA	NA	1679.5	NA	CRISIL AAA/Stable
NA	Long Term Bank Facility^	NA	NA	NA	5478	NA	CRISIL AAA/Stable
NA	Bank Guarantee	NA	NA	NA	0.25	NA	CRISIL AAA/Stable
NA	Proposed Long Term Bank Loan Facility	NA	NA	NA	7842.25	NA	CRISIL AAA/Stable

#Green Debt securities

^includes NABARD’s loan of 100 Million USD equivalent INR

*Yet to be issued