Test1 - Tata Capital IPO: Margins under pressure as funding costs rise and provisioning buffers thin

3. Menorca, Spain

TMFL merger weighs down on Tata Capital’s profitability; provisioning cushion shrinks

The integration of Tata Motors Finance Ltd (TMFL) has added scale and wider vehicle financing to Tata Capital’s portfolio; but it has also introduced higher-cost liabilities and moderate-quality assets, requiring larger provisions and pushing up the blended cost of funds.

Tata Capital’s return on equity and return on assets dipped through FY25 and 1QFY26 because of losses from the recently merged Tata Motors Finance Ltd (TMFL), said SBI Securities. The brokerage expects this to reverse once TMFL turns profitable.

At a glance: Tata Capital FY25 snapshot

Metric

FY25 Value/ Trend

Average Cost of Funds

7.8% (up from 6.6% in FY23)

Net Interest Margin (NIM)

~5.1%

Return on Assets (RoA)

~1.8%

Return on Equity (RoE)

~12.6%

Gross stage-3 loans

2.1%

Provisioning Coverage Ratio (PCR)

58.5% (down from 77.1% in FY23)

Unsecured Loan Share

20% (Rs 46,076 crore)

Loan book growth (FY23-25 CAGR)

37%

Tata Capital’s provision-coverage ratio (PCR) fell sharply to 58.5 percent in FY25 from 77.1 percent in FY23, owing to the TMFL merger, said ICICI Direct. This has left the lending firm with a thinner buffer against future loan losses.

The brokerage warned that a weaker PCR “heightens vulnerability to earnings volatility and capital strain in the event of slippages,” particularly within the retail and SME book that forms nearly 88 percent of loans. Anand Rathi, too, cited the PCR trend -- ranging from 53.9 to 77.1 percent across FY23-FY25 -- as a key risk, adding that inadequate provisioning could adversely affect financial stability.

Analysts say the reduction does not yet signal asset-quality deterioration: gross stage-3 loans stand at 2.1 percent and are still better than sector averages. However, the thinner provisioning cover leaves the lender more exposed should delinquencies rise in a slowing consumption cycle.