Tata Motors looks to spin
off its NBFC arms, merge with IPO-bound Tata Capital
Tata
Motors is planning to hive off its vehicle financing subsidiaries under Tata
Motors Finance Ltd by way of a merger with Tata Capital, to streamline its
operations and deleverage its balance sheet, said people in the know.
The
process will involve a share-swap agreement. Group holding company Tata Sons
will offer shares of Tata Capital to Tata Motors. This will give India's
third-largest carmaker by volume a minority stake in Tata Capital.
Tata
Capital is a 95% subsidiary of Tata Sons and the flagship financial services
company of the conglomerate. Its products include commercial finance as well as
consumer, home, education, personal and car loans. It also offers loans against
property, wealth services, private equity and the distribution and marketing of
Tata Cards.
Tata
Motors Finance is being valued at Rs 15,000-20,000 crore, which translates to
2.6-3.5 times of its FY23 book value of Rs 5,625 crore, said the people cited
above. It is also at a significant premium to the value that Tata Motors equity
analysts ascribe to it.
A
formal announcement is expected in the coming days. Bank of America is advising
Tata Motors.
Tata
Sons and Tata Motors declined to comment. Tata Capital didn't respond to
queries.
Restructuring
Thesis
From
Tata Capital's perspective, this recast is part of streamlining the financial
services portfolio of the group under a single entity ahead of its planned IPO
in 2024-25.
According
to the Reserve Bank of India (RBI), Tata Capital Financial Services, the
holding company of the financial services business, as well as Tata Sons, are
treated as upper layer' non-banking finance companies (NBFCs) and are required
to list by September 2025. The IPO exercise too is expected to kick off in the
coming weeks.
Additionally,
it will help Tata Motors deleverage its balance sheet at a time it's
rationalising its own operations by demerging the passenger and commercial
vehicles businesses. Since it will own shares of Tata Capital after the merger,
Tata Motors can unlock value by monetising that stock during the listing for a
significant upside, said the people cited above.
Separating
the finance arms will also bring down gross debt at Tata Motors, at Rs 1.25
lakh crore in FY23. About 35% of that is the net automotive debt (Rs 43,700
crore), providing clarity on the leverage. It will also reduce the drag on
consolidated financials during the downcycle in commercial vehicles, typically
resulting in higher provisions.
Multiple
Verticals
Tata
Motors Finance Holdings (TMFHL) is a wholly owned subsidiary of Tata Motors.
TMFHL, in turn, has two 100% subsidiaries Tata Motors Finance and Tata Motors
Finance Business Services (TMFBSL). Tata Motors Finance is an NBFC, while TMFHL
is a core investment company.
TMFBSL
handles new vehicle financing while Tata Motors Finance handles dealer and
vendor financing as well as used-car refinance and repurchase. Together, they
are called the TMF group.
Since
January 2015, Tata Motors Finance has been focusing primarily on the
used-vehicle finance business of Tata Motors. It offers a range of solutions,
including fuel loans, with the aim of expanding the market.
The
TMF group disbursed Rs 18,334 crore in vehicle financing during FY23. In the
same fiscal, approximately 17% of commercial vehicle sales in India were made
by dealers with financing arrangements from Tata Motors Finance, according to
the Tata Motors annual report. Revenue stood at Rs 4,927 crore in FY23, though
it posted a loss of Rs 993 crore, compared with a profit of Rs 101 in FY22, due
to increased provisioning for post-pandemic finance receivables.
Tata
Motors Finance had a 12% market share of total commercial vehicle financing in
the first nine months of FY24, as per a Tata Motors quarterly presentation,
down by over half from the year earlier. However, the company expanded its
non-captive disbursement mix to 35% in FY24 while 65% is still captive
commercial vehicle financing.
Assets
under management dropped to Rs 39,537 crore in the first nine months of FY24 as
disbursals declined as Tata Motors Finance sought to improve the quality of its
portfolio and lowered provisioning. However, profits improved profit before tax
rose to Rs 285 crore, against a loss of Rs 511 crore in the previous
corresponding period.
According
to Crisil, of the total AUM as on September 30, 2023, the share of new vehicle
financing was 69%, that for used vehicles was 21% and corporate lending stood
at 10%. Gross non-performing assets (NPAs) and net NPAs stood at 6.5% and 3.6%
at the end of December 2023, compared with 10.9% and 7%, respectively, a year
before.
In
order to improve the return on assets 1% in the third quarter of FY24 Tata
Motors Finance is aiming to improve portfolio quality through prudent sourcing
and strengthening collection infrastructure, besides diversifying the loan book
further to reduce risks and build back AUM, as well as digitising the business
for a shorter turnaround time.
With
the financial services sector gaining momentum from FY19 until the first half
of FY24, Tata Sons has cumulatively invested Rs 5,000 crore in Tata Capital
through rights issues and other means.
Tata
Capital Financial Services and Tata Cleantech Capital were merged with Tata
Capital with effect from January 1. Tata Capital Housing Finance, Tata
Securities, Tata Capital Pte, Tata Capital Advisors Pte Ltd and Tata Capital
Plc and other subsidiaries are housed under the Tata Capital umbrella entity.
www.economictimes.indiatimes.com
dt. 10.05.2024