Tata Capital makes subdued market debut; JM Financial initiates coverage with 'Add' rating, sees up to 9% upside

Tata Capital IPO listing ceremony at NSE

The shares of Tata Capital made their much-anticipated market debut on October 13, listing at 1.2 percent premium over the IPO price at Rs 330 apiece. JM Financial has initiated coverage on the stock with an 'Add' rating, and a target price of Rs 360 apiece.

The latest target price implies an upside potential of more than 9 percent from the stock's current market price of Rs 330 per share. JM Financial noted that the company is one of the leading, diversified non banking financial institution (NBFC) in India with the strong backing of the Tata group. It operates largely in secured business segments.

What JM Financial expects?

"TCL has a highly diversified product mix, offering 25+ distinct lending products broadly classified into three businesses: 61% of its loan book comprising retail finance, 26% SME and 13% corporate loans. With the highest credit rating of AAA/Stable, TCL enjoys easy access to funds at lower interest rates. However, higher share of secured loans and greater competition from banks in TCL's segments lead to lower-than-peers NIMs of ~5-5.5% which along with lower credit cost, gets translated into RoA of ~2.1-2.5% (in FY23/FY24)," the brokerage said.

JM Financial expects Tata Capital to deliver an AUM CAGR of 20 percent during FY25-27E with largely steady opex and gradual decline in credit costs post FY26E. This will likely result in FY25-27E PAT CAGR of approximately 34 percent during FY25-27E, translating into average RoA/RoE of 1.9%/13.2% over FY26E/FY27E, it added.

"Based on its AUM growth and RoE profile, TCL should trade between CIFC and HDB, which have valuation multiple of 3.7x and 2.5x FY27E P/BV, respectively. We assign TCL a target multiple of 2.9x FY27E BVPS reflecting a ~10%- 12% premium/discount to HDB Financial/CIFC," the brokerage added.

Downside risks:

While noting the downside risks, JM Financial listed economic slowdown leading to AUM growth slowdown, delayed NIM expansion, higher credit cost and regulatory risk.

Should you buy, sell or hold?

"Tata Capital becomes the largest diversified non-banking financial company in India at the third place. The company has lent out to 7.3 million customers since it started operations in 2007. Through a wide range of over 25 lending products, it has the potential for a long-term investment in India’s growing financial services sector due to its diverse business model and strong retail, corporate, and housing finance presence," said Master Capital Services.

"Long-term holding of the stock should be considered by investors who received IPO. Meanwhile, those who didn’t get shares in the IPO can purchase when the price goes down," it added.

About Tata Capital IPO:

The Tata Group company had launched its much-awaited public issue to raise Rs 15,512 crore through a fresh issue of shares worth Rs 6,846 crore, and an offer for sale of shares worth nearly Rs 8,666 crore by the existing promoters. Tata Sons and investor International Finance Corporation are selling 26.58 crore equity shares through offer-for-sale component.

The IPO saw decent investor interest during its three days of public bidding, being subscribed around 2 times its offer size between October 6 and October 8 at a price band of Rs 310-326 per share.

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