Tata Capital shares: Systematix retains 'Buy'; sees scope for valuation gap to narrow; check target

Systematix Institutional Equities has retained its 'Buy' rating on Tata Capital Ltd, citing expectations of healthy growth, improving profitability and stable asset quality.

The brokerage said it has retained its estimates, which remain 4/5 per cent above Street expectations. It attributed this to its confidence in the company's execution capability, gradual margin improvement and stable asset quality.

Systematix said Tata Capital remains its top pick in the NBFC space. It noted that the stock currently trades at around a 32 per cent discount to CIFC (Cholamandalam Investment and Finance Company) on FY28 book value per share (BVPS).

The brokerage said there is scope for the valuation gap to narrow as profitability improves and the benefits of the evolving business mix become more visible.

Systematix flagged several risks to its valuation, including prolonged margin pressure, higher funding costs, a change in the growth outlook due to elevated crude oil prices, regulatory changes around flexi loans and any deterioration in asset quality.

Flexi loans remain key monitorable

The proposed RBI framework on revolving credit or flexi loans remains an important monitorable for Tata Capital, Systematix said.

According to the brokerage, management has been engaging with the RBI and has provided detailed inputs. The regulator's key concern appears to be the liquidity risk associated with borrowers drawing their entire sanctioned limits during periods of liquidity stress.

Management said around 80 per cent of customers using such facilities do not have similar limits from banks, while ticket sizes are generally small.

Flexi and revolving products account for around 8-9 per cent of Tata Capital's overall book. However, less than 5 per cent of this exposure is used as a true revolving line, with the majority behaving more like a term loan, according to management.

Loan against securities (LAS) and supply-chain/channel financing constitute around 95 per cent of the flexi exposure and could be relatively more difficult to restructure under any revised framework, the brokerage said.

Management expects the final regulation to evolve materially from the current draft, although the eventual outcome remains uncertain.

Systematix continues to value Tata Capital at 2.7 times FY28E price-to-adjusted book value (P/ABV) and has set a 12-month target price of Rs 400 per share.