Tata Capital IPO: Margins under pressure as funding costs rise and provisioning buffers thin

Tata Capital’s Rs 15,500-crore IPO entered its second day of bidding on Tuesday, having drawn an overall subscription of 0.39 times on day one. The initial public offering -- the largest since Hyundai Motor India’s 2024 listing -- has attracted strong institutional interest. But brokerages caution that beneath the group’s brand comfort lie tightening margins, elevated funding costs and thinner provisioning cover that could curb near-term profitability.

TMFL merger weighs down on Tata Capital’s profitability; provisioning cushion shrinks

The integration of Tata Motors Finance Ltd (TMFL) has added scale and wider vehicle financing to Tata Capital’s portfolio; but it has also introduced higher-cost liabilities and moderate-quality assets, requiring larger provisions and pushing up the blended cost of funds.

Tata Capital’s return on equity and return on assets dipped through FY25 and 1QFY26 because of losses from the recently merged Tata Motors Finance Ltd (TMFL), said SBI Securities. The brokerage expects this to reverse once TMFL turns profitable.

At a glance: Tata Capital FY25 snapshot

Tata Capital’s provision-coverage ratio (PCR) fell sharply to 58.5 percent in FY25 from 77.1 percent in FY23, owing to the TMFL merger, said ICICI Direct. This has left the lending firm with a thinner buffer against future loan losses.

The brokerage warned that a weaker PCR “heightens vulnerability to earnings volatility and capital strain in the event of slippages,” particularly within the retail and SME book that forms nearly 88 percent of loans. Anand Rathi, too, cited the PCR trend -- ranging from 53.9 to 77.1 percent across FY23-FY25 -- as a key risk, adding that inadequate provisioning could adversely affect financial stability.

Analysts say the reduction does not yet signal asset-quality deterioration: gross stage-3 loans stand at 2.1 percent and are still better than sector averages. However, the thinner provisioning cover leaves the lender more exposed should delinquencies rise in a slowing consumption cycle.

Credit-risk concentration still high; funding costs compressing NIMs

Tata Capitals’s unsecured loans made up about 20 percent of gross advances in FY25, or Rs 46,706 crore, down from 24.5 percent in FY24. The gradual reduction signals greater prudence, yet the segment remains large enough to amplify credit costs if recoveries weaken, said ICICI Direct. The unsecured exposure and the TMFL vehicle-finance book together could continue to test capital adequacy in the near term, said Aditya Birla Money.

• Also read | Tata Capital IPO: Strong franchise, fair valuation -- is the Tata premium justified?

Tata Capital enjoys a AAA domestic rating, helping it borrow capital at competitive costs. Yet, the firm’s average cost of borrowings has risen to 7.8 percent in FY25 from 6.6 percent in FY23 amid a higher interest-rate environment and greater reliance on market borrowings. ICICI Direct warned that “sustained increases in borrowing costs could weigh on NIMs and profitability, particularly in a competitive lending environment.”

The rise in funding expenses, coupled with merger-related integration and provisioning, has compressed the company’s net-interest margin, which remains around 5 percent -- well below Bajaj Finance’s 9.9 percent and Cholamandalam Investment’s 6.9 percent.

Capital strength provides a buffer

Brokerages agree that Tata Capital’s diversified loan mix and strong capital position partly offset these risks. With 87.5 percent of lending in retail and SME segments, the portfolio is granular, and capital adequacy remains high. The loan book grew at a 37 percent CAGR over FY23-FY25, reflecting management’s ability to scale even in a costlier-funding environment.

Tata Capital enters the market while navigating a phase of margin compression. While analysts expect profitability to recover, for investors, the IPO is essentially a play on the Tata group’s long-term resilience rather than short-term margin expansion.

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