Tata Motors Finance may merge with Tata Capital

10 May 2024 , 11:06 AM

In order to simplify operations and reduce debt on its balance sheet, Tata Motors intends to split off its car finance companies under Tata Motors Finance Ltd through a merger with Tata Capital, according to news reports.

A share-swap agreement will be a part of the procedure. Tata Motors will receive shares of Tata Capital from group holding firm Tata Sons. As a result, the third-largest carmaker in India based on volume will own a minority share in Tata Capital.

Tata Capital is the main financial services business of the conglomerate and a 95% subsidiary of Tata Sons. Its offerings encompass consumer, house, education, personal, and auto loans in addition to commercial finance. In addition, it provides wealth management, private equity, loans secured by real estate, and Tata Card distribution and marketing.

According to the aforementioned reports, Tata Motors Finance is valued between ₹15,000 and ₹20,000 Crore, or 2.6 and 3.5 times its FY23 book value of ₹5,625 Crore. Additionally, it is far more expensive than the value that analysts of Tata Motors equity assign to it.

In the upcoming days, an official announcement is anticipated. Tata Motors is being advised by Bank of America.

Tata Capital sees this recast as a step toward consolidating the group’s financial services portfolio under one organization in preparation for its anticipated initial public offering (IPO) in 2024–2025.

The Reserve Bank of India (RBI) states that Tata Sons and Tata Capital Financial Services, the firm that holds the financial services business, are classified as “upper layer” non-banking finance companies (NBFCs) and that they must list by September 2025. It is anticipated that the IPO exercise will begin in the upcoming weeks as well.

Additionally, by demerging the passenger and commercial car sectors, it will assist Tata Motors in deleveraging its balance sheet at a time when it is streamlining its own operations. According to news reports, Tata Motors can unlock value by capitalizing on that stock at the listing for a sizable upside because it will control shares of Tata Capital following the merger.

By separating the finance divisions, Tata Motors’ gross debt—which was ₹1.25 Lakh Crore in FY23—will also be reduced. To shed light on the leverage, the net automotive debt (₹43,700 Crore) accounts for almost 35% of that amount. Additionally, it will lessen the burden on consolidated financials when commercial vehicle sales are down, which usually means larger provisions.

Tata Motors Finance has been concentrating on the used-car finance division of Tata Motors since January 2015. Offering a variety of options, such as fuel loans, it hopes to grow the industry.

During FY23, the TMF group provided car financing of ₹18,334 Crore. According to the Tata Motors annual report, dealers having finance agreements with Tata Motors Finance accounted for almost 17% of commercial vehicle sales in India during the same fiscal year. Revenue for FY23 was ₹4,927 Crore, however because of higher provisioning for post-pandemic finance receivables, the company reported a loss of ₹993 Crore as opposed to a profit of ₹101 Crore in FY22.

According to a Tata Motors quarterly presentation, Tata Motors Finance had a 12% market share of all commercial vehicle finance in the first nine months of FY24—a decrease of more than half from the same period the previous year. But in FY24, the corporation increased the percentage of non-captive disbursements to 35%, with the remaining 65% coming from captive commercial vehicle finance.

As of September 30, 2023, 69% of the entire AUM was attributed to financing new cars, 21% to financing used cars, and 10% to business lending, according to Crisil. By the end of December 2023, gross non-performing assets (NPAs) and net NPAs were 3.6% and 6.5%, respectively, down from 10.9% and 7% in the previous year.

Tata Motors Finance is striving to enhance portfolio quality through careful sourcing and fortifying collection infrastructure in addition to diversifying the loan book further to lower risks and rebuild AUM and digitizing the business for a quicker turnaround time in order to improve the return on assets, which was 1% in the third quarter of FY24.

Tata Sons has invested a total of ₹5,000 Crore in Tata Capital through rights issues and other methods, with the financial services industry gaining impetus from FY19 to the first part of FY24.

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