Is Tata Capital IPO a long-term bet or wait-and-watch opportunity? – News Air Insight

ET Intelligence Group: Tata Capital, the lending arm of Tata Sons, plans to raise ₹6,846 crore through fresh equity to augment its capital base and ₹8,665.9 crore through an offer for sale. The promoter’s stake will fall to 85.5% after the IPO from 95.6%. The issue is priced at a discount to peers, reflecting its lower margin and return ratios. Given these factors, investors may prefer to wait and watch the company’s financial performance after listing.

Business

Incorporated in 2007, the third-largest NBFC by loan book reported a strong growth in gross loans to ₹2.3 lakh crore by June 30, 2025 from ₹1.2 lakh crore as of March 31, 2023. Secured loans made up 80% of this portfolio. The lender primarily serves retail and SME customers, who accounted for 87.5% of the total gross loans as of June 30, 2025. Its loan book is highly granular, with ticket sizes ranging from ₹10,000 to over ₹100 crore. The number of branches grew to nearly 1,500 by March 2025 from 539 in March 2023. A merger with Tata Motors Finance (TMF) in May 2025 increased Tata Capital’s loan book and customer base by ₹30,227.2 crore and 2.5 million respectively. However, the new loan book came with a much higher gross non-performing asset (NPA) ratio of 7.1% compared with Tata Capital’s NPA level of around 2%.

Financials
Net profit rose to ₹3,665 crore in FY25 from ₹3,029 crore in FY23. Net interest income nearly doubled to ₹10,690 crore from ₹5,310 crore during the period, but the net interest margin (NIM) stayed range-bound between 5.1% and 5.2%, remaining below peers including Bajaj Finance at 9.5%, and Cholamandalam Investment and Finance at 7.8%. The lower NIM can be attributed to a surge in operating expenses to ₹5,613 crore in FY25 from ₹2,665 crore in FY23, driven by aggressive branch expansion.

Given its relatively low exposure to unsecured loans, the company’s yield on advances stood at 12.6%, trailing 14-18% for peers. Return on assets fell to 1.8% in FY25 from 2.9% in FY23, lower than the peer range of 2.3-4.6%. Return on equity also slipped to 12.6% from 20.6% in FY23, while peers reported returns between 11% and 19%.

Tata Capital’s gross NPAs increased to 2.1% as of June 2025 from 1.7% in FY23. By comparison, Bajaj Finance reported a gross NPA of 1%, while it remained at 4.5% and 4.3% for Shriram Finance and Cholamandalam Investment, respectively, as of June 2025.Valuation
At the higher price band, the issue is valued at a price-book multiple (P/BV) of 3.4 compared with 6.5 for Bajaj Finance and 5.7 for Cholamandalam Investment while HDB Financial Services and Sundaram Finance trade at a P/B of around 3.9.