Nuvama Institutional Equities has increased its target price for Tata Capital Ltd. to ₹415 from ₹400, maintaining a 'HOLD' rating. The revised outlook comes as the financial services firm is expected to see an improvement in its growth trajectory and return ratios, largely due to the fading impact of its merger with Tata Motors Finance Ltd (TMFL).
According to Nuvama, Tata Capital, which has emerged as India's third-largest private NBFC, is entering a new phase of accelerated growth. While the company delivered robust returns in FY23, performance had softened during FY24-FY26 due to higher operating expenses, reduced other income, and the integration challenges associated with the TMFL merger.
Driving Growth and Improved Returns
Management at Tata Capital believes the significant drag from the TMFL merger is now largely behind them. The company projects an expansion in margins by approximately 25 basis points (bps) over the next two years, driven by a more favorable portfolio mix, strategic pricing on new loans, and increased fee income.
Furthermore, Tata Capital aims to enhance its profitability by reducing the cost-to-income ratio to 33-34 per cent from its current 38-39 per cent. This improvement is expected to be supported by operating leverage as the company's growth momentum accelerates. On the credit cost front, management anticipates costs to stabilize around 1 per cent, with no immediate risk of an asset quality or expected credit loss (ECL) reset.
The NBFC is targeting a Return on Assets (RoA) of 2.5-2.7 per cent by FY28, up from approximately 2.3 per cent in Q1 FY27. Nuvama estimates that roughly 60 per cent of this projected improvement will stem from margin expansion, with the remaining 40 per cent attributed to enhanced operating efficiencies.
Valuation and Outlook
Despite the positive growth and return profile foreseen by Nuvama, the brokerage suggests that Tata Capital's current valuation offers limited buffer for any execution setbacks. A further re-rating of the stock, according to Nuvama, would require sustained high growth, consistently stronger return ratios, and disciplined management of both asset quality and margins.
Following the brokerage's updated target, Tata Capital shares closed at ₹370.60, marking a 1.90 per cent increase. Nuvama's target price of ₹415 indicates an implied upside potential of 11.98 per cent from this closing price.