Merger with Tata Motors Finance will broaden Tata Capital’s product portfolio, says Fitch

The planned merger between Tata Capital (TCL) and Tata Motors Finance (TMF) will broaden the former’s product diversity and customer reach and will reinforce its position as a strategic holding within the Tata Group, and as the flagship entity for the group’s financial services segment, Fitch Rating said.

The rating agency also said that the merger is unlikely to create any dramatic shifts in profitability, leverage, or the funding profile of Tata Capital, “such that our view of TCL’s standalone credit profile remains broadly intact.”

Given TMF’s role as the captive financier of Tata Motors, “the merger will raise TCL’s exposure to vehicle finance,” the rating agency said. “We estimate TCL, as the surviving entity, will hold an enlarged vehicle-financing portfolio of about 27 per cent of consolidated gross loans post-merger, compared with around 12 per cent at end-March 2024.”

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The combined book is expected to remain well diversified however, with total non-vehicle retail, SME and corporate exposures comprising 42 per cent, 20 per cent and 11 per cent, respectively, of consolidated loans.

The rating agency observed that Tata Capital as the final merged entity is likely to benefit from a broader customer base and an extended branch network, which should add to its competitive position in vehicle financing.

The vehicle loan portfolios of the two companies are also complementary. TCL predominantly finances construction equipment, second-hand cars, and two-wheelers, while TMF’s exposure is concentrated on commercial vehicles and new passenger vehicles, primarily sold by Tata Motors. “We expect TCL to leverage TMF’s product expertise to serve a wider range of customer needs,” Fitch said.

TCL conducts its vehicle financing on an arms-length commercial basis and is likely to continue doing so after the merger, with major third-party financial institutions already offer financing for Tata Motors’ products. “We expect TCL to similarly compete for such business - albeit with the reputational and operational advantage of being part of the Tata group.”

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Fitch said it expected Tata Capital to continue providing financing to Tata group business partners on a commercial basis.

However the rating agency warned of integration risks since the merging entities had different operating platforms, which may present integration risks. “We believe management will navigate such issues adequately, due to their aligned interests as part of the Tata group, and reasonable planning lead time ahead of the merger’s completion.”

TMF has a higher NPA and restructured loan ratio that can weigh on TCL’s reported asset quality post-merger, but Fitch said it expected the management team to “tighten underwriting criteria to strengthen credit quality over the next few years.”

It pointed out that there may be some repositioning of TMF’s loan mix as part of fine-tuning vehicle lending strategy “but any run-off should be offset by growth in the rest of TCL’s portfolio.”

Fitch said its ratings on TCL were predicated on the expectation of continued Tata group support, including in times of stress. “We believe the prospects for support are unaffected by this merger, which demonstrates TCL’s continued role as its parent group’s key financial services and lending vehicle.”

The merger is expected to complete within 10-12 months. Tata Motors indirectly has 100 per cent stake in TMFL through an intermediate company, which will take up an approximate 4.7 per cent stake in TCL under the merger proposal.