Tata Capital shares: Nuvama ups target price; says Tata Motors Finance drag largely behind

Tata Capital Ltd is likely to see an improvement in growth and return ratios as the impact of the Tata Motors Finance Ltd (TMFL) merger largely fades, according to Nuvama Institutional Equities. The domestic brokerage has raised its 12-month target price on the stock to Rs 415 from Rs 400 while retaining its 'HOLD' rating.

Nuvama said Tata Capital had delivered a return on assets (RoA) of 2.5 per cent and return on equity (RoE) of 20 per cent in FY23. However, performance weakened during FY24-FY26 amid higher operating expenses, lower other income and the merger with TMFL.

The brokerage highlighted that management believes the TMFL merger-related drag is now largely behind the company. Tata Capital expects margins to expand by around 25 basis points (bps) over the next two years, driven by a better portfolio mix, pricing on incremental loans and higher fee income.

Management is also targeting an improvement in the cost-to-income ratio to 33-34 per cent from 38-39 per cent. It expects operating leverage to support profitability as growth accelerates.

On credit cost front, management expects credit cost to settle at around 1 per cent and does not currently see a risk of an asset quality or expected credit loss (ECL) reset.

Tata Capital is targeting an RoA of 2.5-2.7 per cent by FY28, compared with around 2.3 per cent in Q1 FY27. Nuvama said around 60 per cent of the expected improvement could come from margins, with the remaining 40 per cent coming from operating efficiencies.

The brokerage noted that Tata Capital has emerged as the third-largest private NBFC and is entering a phase of higher growth.

While the brokerage sees an improving growth-return profile, it believes the current valuation leaves limited room for execution misses. It said a further re-rating would require sustained high growth, stronger return ratios and continued discipline on asset quality and margins.

Meanwhile, Tata Capital shares rose 1.90 per cent to settle at Rs 370.60 on Wednesday. At this closing price, Nuvama's target price of Rs 415 implies an upside potential of 11.98 per cent.