Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AAA/Stable’ rating on non-convertible debentures of Rs 3000 crore of Tata Capital Financial Services Limited (TCFSL). CRISIL has also reaffirmed its ratings on the company's other debt instruments and bank facilities at 'CRISIL AAA/CRISIL PPMLD AAA r/CRISIL AA+/Stable/CRISIL A1+’. CRISIL Ratings has also withdrawn its rating on the non-convertible debentures of Rs 648.2 crore, Long Term Principal Protected Market Linked Debentures of Rs 264.9 crore and Retail Bonds of Rs 50.29 crore (See Annexure 'Details of Rating Withdrawn' for details) in line with its withdrawal policy. CRISIL has received independent confirmation that these instruments are fully redeemed.

 

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of Tata Capital Limited and its subsidiaries TCFSL, Tata Capital Housing Finance Limited (TCHFL), Tata Cleantech Capital Limited (TCCL), Tata Securities Ltd and Tata Capital Pte Ltd, Singapore), all together referred to as Tata Capital Limited (TCL) group.

 

Ratings for TCL group is driven by increased strategic importance of the financial services business to Tata Sons Private Limited (Tata Sons; rated 'CRISIL AAA/FAAA/Stable/CRISIL A1+'). This is in line with the Tata group's focus on domestic consumption as a key theme in their growth philosophy. The TCL group, as the principal vehicle for non-captive lending, plays a key role through which this strategy will be implemented.

 

The rating also factors in the strong support by the parent Tata Sons demonstrated by articulation of its intention to (i) to maintain majority shareholding in the TCL group, (ii) to assist TCL group in organizing for any shortfall in maintaining capital adequacy as per applicable regulations and (iii) to conduct the business of TCL group in a manner that would enable TCL group to perform its obligations to all lenders and debt holders in full and timely manner.

 

The prefix 'PP-MLD' indicates that the principal amount of the debentures is protected, while returns remain market-linked. The suffix 'r' shows that the returns on the debentures have significant risks other than credit risk. Also, payments to investors are not fixed and are linked to external variables such as government yield, commodity prices, equity indices, foreign exchange rates, or equity valuation of the company.

Analytical Approach

For arriving at its ratings, CRISIL Ratings has combined the business and financial risk profiles of TCL and its subsidiaries TCFSL, TCHFL, TCCL, Tata Securities Ltd and Tata Capital Pte Ltd, Singapore) . This is because they have significant operational and management linkages, and operate under the common Tata Capital brand. The ratings also factor in strong support from TCL’s parent, Tata Sons given the strategic importance of TCL and its subsidiaries as the principal vehicle of non-captive lending in the group and the Tata Sons’ strong articulation of support.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

* Strategic importance to, and expectation of strong support from the ultimate parent, Tata Sons

CRISIL's ratings on debt instruments of TCL group continue to be based on the expectation of strong support that the group is expected to receive from the ultimate parent, Tata Sons. This is due to Tata Sons’ majority ownership in the TCL group, coupled with the increasing importance of the financial services business to the Tata group.

 

Tata Sons directly owns 94.55% of TCL's equity shares and most of the remaining stake is held by the other Tata group companies and trusts. TCL in turn holds 100% stake in its two main subsidiaries- TCFSL and TCHFL. Tata Sons also has personnel from its senior management on TCL's board. Tata Sons has infused of Rs 6,300 crore in Tata Capital since inception of which Rs 1,000 crore was infused in fiscal 2020 and Rs 2,500 crore was in fiscal 2019  indicating the intent of the group to step up its focus on the lending business.

 

TCL group, as the Tata group’s non-captive lending vehicle, is the primary financial services arm, and remains critical to the group, given the growth opportunities in this sector over the medium to long term. TCL group is also strategically important to the Tata group because it caters to the funding requirements of various entities associated with the group, such as its suppliers, vendors, and dealers. The shared brand and infrastructural synergies with various Tata group companies strengthen the integration of the TCL group with the overall Tata group. Business synergies are set to increase further as TCL taps into the Tata group ecosystem as part of its growth strategy. CRISIL Ratings believes that Tata Sons will continue to have majority ownership in, and management control of TCL and its subsidiaries, over the medium term.

 

* Comfortable capitalization to support medium term growth plans, supported by regular infusion from parent

TCL group has comfortable capitalization, with combined networth of Rs 11,742 crore as on September 30, 2021 against consolidated networth Rs 11,132 crore (including Compulsorily Convertible Preference Shares) as on March 31, 2021. The group companies TCFSL, TCHFL and TCCL remain adequately capitalised and the TCL Group has been supported by regular infusion from its parent to support growth.

 

As on September 30, 2021, the networth of TCFSL was Rs 6,929 crore and gearing was 6.2 times (Rs 6,735 crore and 5.7 times as on March 31, 2021). The capital adequacy of TCFSL was comfortable with tier-1 capital level of 12.5% and total capital ratio of 17.5% as on September 30, 2021.

 

For TCHFL, as on September 30, 2021, the networth was Rs 3,244 crore and gearing was 7.3 times (Rs 3,079 crore and gearing was 7.7 times as on March 31, 2021). The capital adequacy of TCHFL was comfortable with tier-1 capital level of 14.4% and total capital ratio of 18.7% as on September 30, 2021.

 

For TCCL, the networth was Rs 1,569 crore and the gearing was 3.7 times as on September 30, 2021 (Rs 1,162 crore and the gearing was 4.6 times as on March 31, 2021). The tier-1 capital and total capital ratio of TCCL was 19.4% and 26.2% as on September 30, 2021.

 

TCL group's combined gearing stood at 6.2 times as on September 30, 2021  against consolidated gearing at 6.1 times as on March 31, 2021 (6.7 times as on March 31, 2020). CRISIL Ratings believes that TCL group is adequately capitalized to absorb asset-side risks. CRISIL Ratings also believes that despite its significant growth plans, TCL group's capitalization is expected to remain comfortable, given Tata Sons' commitment to support growth in the financial services business.

 

* Diversified resource profile

TCL group also has access to funding from a diverse base of lenders; the funding profile is balanced with a mix of non-convertible debentures, bank borrowings, and short-term debt. As on September 30, 2021, overall market borrowings stood at about 54% of total borrowings. TCL and its subsidiaries have the ability to mobilize debt at competitive costs, given their association with the Tata group. In fiscal 2021, the overall quantum of resources raised in fiscal 2021 were Rs 63,316 crore (Includes CP raised for IPO financing) and for the first 9 months of fiscal 2022, the quantum of resources raised was Rs 86,302 crore which included Rs 37,250 crore of CP raised for IPO financing.

 

Weakness:

* Average asset quality

On a consolidated basis, TCL group's gross non-performing assets (NPAs) and net NPAs stood at 2.5% and 0.9% respectively as on March 31, 2021 against 1.9% and 0.6% respectively as on March 31, 2020.

 

In case of TCFSL, the gross stage-3 was 2.6% as on September 30, 2021 against 3.0% as on March 31, 2021. The company's provision coverage ratio for stage-3 assets was 74% as on September 30, 2021 thereby translating into net NPA to 0.7%. Additionally, restructuring in TCFSL was 3.9% (Rs 1,882 crore) of the portfolio as on September 30, 2021.

 

TCHFL's reported stage-3 was 1.9% as on September 30, 2021 against 2.1% as on March 31, 2021. The provision coverage ratio stood at 55% as on September 30, 2021 leading to net NPA of 0.8%. Additionally, restructuring in TCHFL was 5.3% (Rs 1,403 crore) of the portfolio as on September 30, 2021.

 

TCCL had stage -3 of 0.9% and net NPA of 0.6% respectively as on September 30, 2021 against 1.0% and 0.9% respectively as on March 31, 2021. The provisioning coverage ratio of TCCL was 36.4% as on September 30, 2021.

 

The collections of the entities in the group was marginally impacted in the month of May and improved back to the normal level since June 2021. However, the impact on the asset quality, especially in riskier segments such as unsecured lending and the wholesale lending remains a key monitorable.

 

* Moderate earnings profile

TCL group's profitability has been subdued in the past due to high credit costs. The combined profit after tax (PAT) for first six months of fiscal 2022 was Rs 548 crore against consolidated PAT of Rs 1,245 crore in fiscal 2021 ( Rs 156 crore in fiscal 2020).

 

For TCFSL, the PAT for first six months of fiscal 2022 stood at Rs 233 crore on a total income (net of interest income) of Rs 1,679 crore against Rs 677 crore on a total income (net of interest expenses) of Rs 3,093 crore for fiscal 2021. TCFSL's return on managed assets stood at 0.9% in the first six months of fiscal 2022 against 1.4% for fiscal 2021. The provisioning expense for first six months of fiscal 2022 was Rs 709 crore against Rs 1,013 crore for fiscal 2021. In case of TCHFL, the PAT for the first six months of fiscal 2022 was Rs 215 crore on a total income (net of interest expenses) of Rs 603 crore against Rs 355 crore for fiscal 2021 on a total income (net of interest expenses) of Rs 1,130 crore against Rs 152 crore for fiscal 2020. TCHFL’s return on  managed assets stood at 1.5% for first six months of fiscal 2022 against 1.2% for fiscal 2021. The provisioning expense for TCHFL was Rs 148 crore in first six months of fiscal 2022 against Rs 357 crore in fiscal 2021. For TCCL, the PAT for the first six months of fiscal 2022 stood at Rs 100 crore on a total income (net of interest expenses) of Rs 164 crore against a PAT of Rs 168 crore for fiscal 2021 on a total income (net of interest expenses) of Rs 290 core.

 

CRISIL Ratings understands that the incremental stress in the current loan portfolio from Covid-19 is expected to be limited. However, the performance of the restructured portfolio of the group, the extent of impact on profitability and credit cost remains monitorable.

Liquidity: Superior

TCFSL’s Asset Liability Management (ALM) as on December 31, 2021 shows no cumulative negative mismatches upto 1 year maturity bucket (the inflows include existing committed bank lines). In terms of liquidity, as on December 31, 2021, TCL Group had total cash equivalents and unutilised working capital lines of Rs 9,608 crore (Rs 1,435 crore of cash and equivalents and Rs 8,173 crore of unutilised working capital lines). The external debt repayment cover of TCL Group for two months was 1.3 times and TCL Group had external debt repayments of Rs 7,649 crore over the next two months ending February 28, 2022.

Outlook: Stable

CRISIL believes that TCL group will remain highly strategically important to Tata Sons, and continue to benefit from the strong parent support over the medium term. The outlook may be revised to ‘Negative’ in case of a decline in Tata Sons’ credit quality or in CRISIL’s view, a diminution in expected support to TCL group. The outlook may also be revised to ‘Negative’ in case of significant pressure on the TCL group’s asset quality, impacting the group’s earnings.

Rating Sensitivity factors

Downward factors

• Downward revision in the credit rating of Tata Sons Private Limited (Tata Sons)
• Any change in the support philosophy of Tata Sons resulting in reduced support to Tata Capital Group
• Sharp deterioration in consolidated asset quality with consolidated gross NPA remaining above 6% and in-turn impacting capital and earnings.

About the Company

TCFSL is a wholly subsidiary of TCL, registered with the Reserve Bank of India as a Systemically Important Non-Deposit Accepting Non-Banking Financial Company (NBFC) and offers fund and fee-based financial services to its customers. A trusted and customer- centric, one-stop financial services provider, TCFSL caters to the diverse needs of retail, corporate and institutional customers, across various areas of business namely the Commercial Finance, Wealth Management, Consumer Loans. It has a diversified product portfolio, with almost equal presence across both retail and wholesale finance segments. As on March 31, 2021, TCFSL had networth of Rs 6,735 crore.

 

TCL is the holding company for the financial services businesses of the Tata Capital group and is registered with the Reserve Bank of India as a systemically important, non-deposit-taking, Core Investment Company. Tata Capital has a diversified product portfolio with a presence in both the wholesale and retail finance segments. It had sizeable AUM of Rs 77,219 crore end fiscal 2021 as against 77,610 crore end fiscal 2020. The fund-based products and services are primarily offered by TCFSL (both wholesale and retail finance segments), TCHFL (mortgage finance), and TCCL (infrastructure finance). The fee-based services distribution of mutual funds and insurance products, stock broking, and investment banking are offered through the wholly owned subsidiary, Tata Securities Ltd.

Any other information: Not applicable