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Tata Capital IPO: JM Financial Sees Strong Long-Term Potential
Tata Capital – JM Financial has initiated coverage on Tata Capital Ltd with an ‘Add’ rating, setting a target price of Rs 360, based on a 2.9x FY27E price-to-book value (P/BV) valuation. The report highlights Tata Capital’s robust fundamentals, strong growth outlook, and strategic realignment following its merger with Tata Motors Finance.
Tata Capital: A Growing Force in India’s NBFC Sector
Established in 2007, Tata Capital has evolved into one of India’s leading diversified non-banking financial companies (NBFCs), backed by the reputable Tata Group. With around 80% of its loan book secured, the company’s retail lending business accounts for 61% of total loans, demonstrating a strong focus on consumer credit.
The NBFC offers a wide suite of 25 lending products spanning retail (61%), SME (26%), and corporate (13%) loans, supported by a AAA/Stable credit rating that ensures access to low-cost funding.
AUM Growth and Financial Performance: Past and Future
Tata Capital delivered a stellar AUM CAGR of 31% during FY22–FY24, with average Return on Assets (RoA) and Return on Equity (RoE) at 2.3% and 18%, respectively. However, the recent merger with Tata Motors Finance (TMFL) introduced temporary headwinds, moderating AUM YoY growth to 17% and compressing RoA/RoE to 1.6%/13% in FY25.
Despite this short-term dip, JM Financial projects a sharp rebound, forecasting a 20% AUM CAGR and 34% PAT CAGR over FY25–27, alongside average RoA of 1.9% and RoE of 13% during FY26–27.
Merger Impact: Complexity Today, Benefits Tomorrow
The integration of TMFL added operational complexity and diluted near-term profitability. However, JM Financial believes that Tata Capital’s plan to scale its non-captive lending book will gradually improve the merged entity’s performance.
While credit costs—especially in Personal Loans (PL), Business Loans (BL), MSME, and MFI segments—are expected to remain elevated in the near term, they are projected to decline starting H2FY26, aiding RoA expansion going forward.
Expanding Footprint Fuels Future Growth
Post-merger, Tata Capital has embarked on aggressive branch expansion, growing from 267 branches in FY22 to 1,516 branches as of 1QFY26, including 353 additions. This wider footprint is expected to enhance cross-selling opportunities, bolster operating leverage, and lower the cost-to-income ratio from 42% in FY25 to 39% by FY27E.
Valuation and Peer Comparison
At the upper IPO price band of Rs 326, Tata Capital is valued at 2.7x FY27E P/BV. JM Financial’s target valuation of 2.9x FY27E BVPS places Tata Capital between peers like CIFC (3.7x) and HDB Financial (2.5x). The report reflects confidence in Tata Capital’s ability to command a 10–12% premium or discount to its closest peers, based on its balanced growth trajectory and improving fundamentals.
Profitability Metrics and Margin Profile
Tata Capital’s Net Interest Margins (NIMs) remain slightly below peers at 5–5.5%, owing to the high share of secured loans and competition from banks. Nonetheless, this conservative loan mix supports RoAs in the range of 2.1–2.5% during FY23–24.
The ongoing optimization of its loan book, combined with scale and digital initiatives, is likely to gradually improve margins and efficiency across business segments.
Despite temporary challenges stemming from the Tata Motors Finance merger, Tata Capital appears well-positioned for sustainable growth, underpinned by its diversified loan portfolio, strong brand backing, and strategic expansion initiatives.
As it scales its presence and improves asset quality, Tata Capital could become one of the most compelling stories in India’s NBFC space, particularly as RoA/RoE metrics recover and cross-selling opportunities increase across its expanded network.
With the IPO valuation implying a reasonable multiple and further upside potential identified by JM Financial, the stock now sits squarely on the radar of market watchers monitoring India’s financial sector evolution.
