Tata Capital IPO reality check: 3 pros and 3 cons you must know
Tata Capital, the third-largest Non-Banking Financial Company (NBFC) in India with a highly diversified portfolio, has made its debut public offering (IPO) worth ₹15,512 crore. The biggest IPO of the year has attracted substantial investor interest. If you are also looking to subscribe to the IPO issue, you must understand these Pros and cons to make an informed decision.
Tata Capital IPO details
Tata Capital's IPO subscription deadline is October 8 and listing is expected on October 13 on both NSE and BSE.
Size: ₹15,512 crore
Price Band: ₹310 to ₹326 per share
Lot Size: 46 shares (minimum investment of approximately ₹14,996)
Use of Proceeds: ₹6,846 crore for the expansion of the company and ₹8,666 crore for the promoters to sell their shares.
Pros of investing in Tata Capital IPO
Strong brand and credit rating: Tata Capital is backed by the brand name and 150-year-old legacy of the Tata Group which is the main reason for the highest levels of investor confidence and trust. Both the credit rating agencies CRISIL and ICRA have assigned the highest credit ratings i.e., AAA to Tata Capital which serves as a stamp of guarantee to the company's credit.
Robust financial performance: The net profit has grown from ₹3,029 crores in FY23 to ₹3,665 crores in FY25, while net interest income has grown almost twice and went up from ₹5,310 crores in FY23 to ₹10,690 crores in FY25.
Profitable credit growth: The credit growth had a Compound Annual Growth Rate (CAGR) of 37% from FY23 to FY25 and the loan book size has reached ₹2.33 lakh crore. Around 80% of the loans are secured thus the risk exposure stays at a low level. Also, the projection of growth from 15% to 17% in FY25 to FY28 suggests the steep potential for future expansion.
Diversified business portfolio: The latest RBI norms for NBFCs are less rigorous for the companies with diversified portfolios like Tata Capital that is into retail loans, corporate finance, and asset management and thus is relatively less dependent on any one segment.
Experienced Management: The advantage of the company is a competent leadership which has demonstrated a track record of success in handling credit risk and business operations.
Cons and Risks to Consider
Low net Interest margin (NIM): The NIM that is the difference between the cost of funds and the yield on loans is around 5%. This is significantly lower than that of Bajaj Finance which is almost 10%. As a result, with a lower NIM, Tata Capital will be generating a relatively lower profit from its lending activities.
Rising non-performing assets (NPAs): The company's Stage 3 Gross loans, which are loans that have been overdue for more than 90 days, have increased in comparison to the previous year. If the trend continues, it will be a threat to asset quality and the company’s future profitability.
Decreased provision coverage ratio: The provision coverage ratio of Tata Capital, a measure that shows the amount of money set aside to cover the risk of loan losses, has been continuously going down. A decrease in the provision reserve can result in more serious consequences in the case of sudden defaults or an economic downturn.
Competitive market landscape: The Indian NBFC scenario is highly competitive with several strong players who have already been there for quite some time. Hence, it will be quite difficult for Tata Capital to compete with the likes of Bajaj Finance, Cholamandalam, and HDB Financial. They will not easily grab the market share.
Modest listing gains expected: According to market experts, IPO traders might achieve only up to 3% maximum profit as the share price is predicted to debut at around ₹336 on the upper end of ₹326. Thus, the amount of profit from the short-term listing will not be very pleasing.
Should you invest in Tata Capital IPO?
Initially, for a patient investor looking for stability and long-term growth, Tata Capital stock market debut may well be worth considering. The strong financials, huge loan growth and the association with the Tata brand are some of the reasons to believe in the company.
On the other hand, if you are expecting a quick listing price pop, then the forecast of this IPO is probably not what you expect due to the low upside in the listing price. Besides that, asset quality and margins being potential risk areas in the future make it worthwhile to keep a close watch.
