Rating Rationale

Strengths
*Strategic importance to, and expectation of strong support from the ultimate parent, Tata Sons
CRISIL's ratings on debt instruments of TCFSL continue to be based on the strong support that TCL and its subsidiaries are expected to receive from the ultimate parent, Tata Sons. This is due to Tata Son's majority ownership in TCL coupled with the importance of the financial services business to the Tata group.

CRISIL believes Tata Sons will continue to strongly support TCL and its subsidiaries over the medium term. Tata Sons directly owns 93.22% of TCL's equity shares and most of the remaining stake is held by other Tata group companies and trusts. Tata Sons also has personnel from its senior management on TCL's board. Tata Sons has infused equity capital of around Rs.2,800 crore in TCL since TCL's inception. Tata Capital is the Tata group's financial services arm, and remains critical to the group, given the growth opportunities in this sector over the medium to long term. Tata Capital 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 Tata Capital with the Tata group. CRISIL believes that Tata Sons will continue to have majority ownership in, and management control of TCL and its subsidiaries, over the medium term.

* Adequate Capitalization to support medium term growth plans
Tata Capital has adequate capitalisation, with an absolute networth (on a consolidated basis and including minority interest) of Rs 6816 crore as March 31, 2018 (Rs 6206 crore as on March 31, 2017). As on March 31, 2018, both TCFSL and TCHFL remained adequately capitalised with overall capital adequacy ratio of 16.68% and 17.22% respectively (16.07% and 16.01% respectively as on March 31, 2017 and 16.34% and 16.17% as on March 31, 2016 respectively). The gearing of TCFSL and TCHFL stood at 6.3 times and 10.3 times respectively as on March 31, 2018 (6.7 times and 11.9 times respectively as on March 31, 2017). Tata Capital's consolidated gearing stood at 7.8 times as on March 31, 2018. CRISIL believes that Tata Capital is adequately capitalised to absorb asset-side risks. CRISIL also believes that despite its significant growth plans, Tata Capital's capitalisation is expected to remain comfortable, given Tata Sons' commitment to support growth in the financial services business.

* Diversified resource profile
Tata Capital also has adequate access to funding from a diverse base of lenders; the funding profile is fairly balanced with a mix of non-convertible debentures, bank borrowings, and short-term debt. TCL and its subsidiaries have the ability to mobilize debt at competitive costs, given their association with the Tata group.

Weaknesses
* Modest asset quality
In case of TCFSL, the asset quality in the wholesale lending segment has shown improvement in the last financial year, however due to macroeconomic challenges and large exposure to relatively vulnerable segments, the asset quality will continue to remain a key moniterable. Furthermore, a sizeable proportion of the retail loan book remains unseasoned given the strong growth in recent years. TCFSL's gross non-performing assets (NPAs) and net NPA stood at 3.3% and 0.9% respectively as on March 31, 2018 (4.9% and 1.2% respectively as on March 31, 2017 and 5.3% and 3.1% respectively as on March 31, 2016). The CRISIL adjusted provision coverage ratio remains strong at 73.4% as on March 31, 2018 (76.2% as on March 31, 2017). While TCFSL's asset quality has improved, the company's ability to maintain asset quality, especially in the large ticket sized corporate lending book book (corporate loan book including construction equipment financing forming 57.5% of assets under management as on March 31, 2018) that has been under stress and thus will continue to be moonitored

TCHFL's GNPA and NNPA, while remaining low, have inched to 1.2% and 0.5% respectively as on March 31, 2018 (0.9% and 0.5% respectively as on March 31, 2017 and 0.7% and 0.5% respectively as on March 31, 2016). However the CRISIL adjusted provision coverage ratio has improved to 61% as on March 31, 2018 (49.7% as on March 31, 2017 and 37.3% as on March 31, 2016). Given TCHFL's strong growth, the impact of seasoning will be visible only over the medium term. TCCL had no gross NPAs as on March 31, 2018.

CRISIL will monitor the ability of these companies to maintain low delinquency levels across asset classes over economic cycles. On a consolidated basis, Tata Capital's GNPA and NNPA stood at 2.4% and 0.7% respectively as on March 31, 2018 (3.4% and 0.9% respectively as on March 31, 2017)

* Average earnings profile
Tata Capital's profitability remains average. For fiscal year ending March 31, 2018, its return on average assets (RoA) ratio stood at 1.3% (on a consolidated basis) as against 0.9% in fiscal 2017 and 1.0% in fiscal 2016. Tata Capital's earnings profile remains constrained by relatively low gross interest spreads, modest fee-based income, and high operating expenses. Furthermore, the earnings profile remains susceptible to any sharp increase in credit costs, especially in the wholesale lending business.

TCFSL's RoA for year ending March 31, 2018 improved to 1.3% as compared to 0.7% reported last year driven by improved margins, lower cost of borrowings coupled with reduced provisioning costs. TCHFL's RoA for fiscal 2018 stood at 1.1%, almost unchanged from 1.2% last year. CRISIL will continue to monitor Tata Capital's profitability, operating efficiencies, scale of fee-based-income, and credit cost, over the medium term.