Systematix Institutional Equities has reaffirmed its 'Buy' rating for Tata Capital Ltd, projecting a 12-month target price of Rs 400 per share. The brokerage firm highlighted healthy growth prospects, improving profitability, and stable asset quality as key drivers behind its optimistic outlook for Tata Capital shares.
The firm believes there is significant scope for the valuation gap between Tata Capital and its peers, such as Cholamandalam Investment and Finance Company (CIFC), to narrow. Currently, Tata Capital trades at approximately a 32 percent discount to CIFC on FY28 book value per share (BVPS). Systematix attributes this potential narrowing to anticipated improvements in profitability and the increasing visibility of benefits from Tata Capital's evolving business mix.
Key Drivers and Valuation
Systematix has retained its earnings estimates for Tata Capital, which remain 4-5 percent above Street expectations. This confidence stems from the company's strong execution capabilities, gradual margin improvement, and consistent asset quality. The brokerage values Tata Capital at 2.7 times FY28E price-to-adjusted book value (P/ABV) to arrive at its target.
Risks to Outlook
Despite the positive stance, Systematix has identified several risks that could impact its valuation. These include sustained margin pressure, higher funding costs, a potential shift in the growth outlook due to elevated crude oil prices, and any adverse regulatory changes concerning flexi loans. Deterioration in asset quality also remains a significant concern.
Flexi Loans: A Key Monitorable
The proposed Reserve Bank of India (RBI) framework for revolving credit or flexi loans stands out as an important monitorable for Tata Capital. Management has been actively engaging with the RBI, providing detailed inputs. The regulator's primary concern appears to be the liquidity risk if borrowers were to draw their entire sanctioned limits during periods of financial stress.
According to Tata Capital's management, roughly 80 percent of customers utilizing such facilities do not possess similar limits from traditional banks, and the ticket sizes for these loans are generally small. Flexi and revolving products collectively account for 8-9 percent of Tata Capital's total loan book. However, less than 5 percent of this exposure is used as a true revolving line, with the majority behaving more like a traditional term loan.
Loan Against Securities (LAS) and supply-chain/channel financing constitute approximately 95 percent of the flexi exposure. These segments, the brokerage notes, could be relatively more challenging to restructure under any revised regulatory framework. Management anticipates the final regulation to evolve considerably from its current draft, though the ultimate outcome remains uncertain.