Tata Capital AUM growth stays healthy as NIM expansion drives RoA outlook

Investment View and Valuation

Motilal Oswal Financial Services maintained its Neutral rating on Tata Capital following a steady 1QFY27, marked by healthy and broad-based AUM growth and marginal asset-quality improvement. The broker considers NIM expansion critical to improving return on assets (RoA). Its target price is Rs 390, based on 2.7 times March 2028 estimated book value per share.

Motilal Oswal believes prevailing valuations adequately reflect Tata Capital's near-term growth and earnings potential, although the operating outlook remains favourable.

1QFY27 Financial Performance

Tata Capital reported consolidated PAT before non-controlling interest of about Rs 16.3 billion in 1QFY27, up 56 per cent year-on-year and about 9 per cent above Motilal Oswal's estimate. Consolidated PAT after non-controlling interest increased 56 per cent year-on-year to Rs 15.5 billion, in line with the broker's estimate.

Other income growth was led primarily by higher rental and investment income. The operating performance benefited from an improved cost-to-income ratio, while credit costs were below expectations.

AUM Growth and Business Mix

Consolidated AUM excluding motor finance rose about 28 per cent year-on-year and 5.6 per cent quarter-on-quarter to Rs 2.66 trillion. Including motor finance, AUM increased about 22 per cent year-on-year and 4.8 per cent quarter-on-quarter to Rs 2.91 trillion.

The motor-finance net loan book declined to Rs 244 billion from Rs 254 billion in the preceding quarter, as Tata Capital adopted a calibrated approach amid geopolitical uncertainty and elevated fuel costs. The company is focused on transforming and integrating this business and targets approximately 2 per cent RoA in motor finance by FY28.

Asset Quality and Capital Position

Asset quality improved modestly, with consolidated gross and net stage 3 ratios each declining about 10 basis points quarter-on-quarter to 1.9 per cent and 0.8 per cent, respectively.

Management said asset quality was stable or better across unsecured, SME and corporate products, supported by disciplined underwriting and collections. It expects full-year FY27 credit costs to remain below 1 per cent. Capital adequacy stood at 18.5 per cent, including Tier 1 capital of 15.6 per cent, while debt-to-equity was 5.3 times.

Margins and RoA Improvement

The key near-term pressure was margin. Calculated yields expanded 5 basis points quarter-on-quarter to 11.2 per cent, but calculated borrowing cost rose 20 basis points to 7.25 per cent. Consequently, spreads and calculated NIM declined 15 basis points to 3.9 per cent and 5.05 per cent, respectively.

Management expects roughly 10 basis points of NIM improvement in FY27 through pricing, portfolio mix and a greater contribution from higher-yielding products. It expects cost of funds to rise around 8-10 basis points. Motilal Oswal estimates NIM of 5.2 per cent in FY27E and 5.4 per cent in FY28E.

Management Growth Outlook

Management guides for AUM growth of 23-25 per cent in FY27 across retail, SME, housing and unsecured lending, while Motilal Oswal models about 22 per cent growth. Unsecured retail disbursements rose 38 per cent year-on-year in 1QFY27, although AUM grew only 10 per cent because of elevated runoff. Management expects unsecured retail to outgrow the overall book by 3QFY27 or 4QFY27.

Retail and SME are expected to account for 85-88 per cent of AUM. Affordable and micro-housing are expected to grow about 30 per cent in FY27, while micro-housing AUM is targeted to grow about 100 per cent from a small base.

The proposed gold-loan acquisition remains subject to regulatory approvals. Management expects RBI approval by end-CY26 and aims to add about 500 gold-loan branches and build a portfolio above Rs 40 billion over 2.5-3 years.

Estimates, Return Outlook and Key Risks

Motilal Oswal broadly retained its FY27 and FY28 EPS estimates. It forecasts AUM and PAT CAGRs of 23 per cent and 35 per cent over FY26-28E, respectively, with FY28E RoA of about 2.3 per cent and RoE of about 15.6 per cent.

The broker identifies the following as important levers for RoA improvement:

• Successful NIM expansion.
• Operating leverage.
• Growth in high-margin products.
• Credit costs remaining below 1 per cent.

Conversely, the operating outlook could weaken because of further cost-of-funds pressure, failure to expand NIM, continued elevated unsecured runoff, motor-finance integration risks and adverse asset-quality trends.