Tata Capital Gets Lowest Investment Grade 'BBB-/A-3' Rating From S&P

Tata Capital Ltd.'s received the lowest long- and short-term investment-grade credit rating from S&P Global Ratings, reflecting the ongoing and extraordinary support from the Tata Group.

The global rating agency has assigned 'BBB-' long-term and 'A-3' short-term issuer credit ratings to India-based Tata Capital Ltd. The outlook on the long-term rating is 'stable'.

Tata Capital is a "moderately strategic" subsidiary of Tata Sons, given its sizable contribution to the parent's earnings and stability, S&P said. "We believe Tata Sons will provide extraordinary support to Tata Capital, if required, in times of financial stress."

Tata Capital also gains from infrastructural synergies with various Tata Group companies. Tata Sons is the largest shareholder in Tata Capital. We view reputational risk as a strong incentive for parental support for Tata Capital, S&P said.

Being part of the big conglomerate has also enabled it to grow rapidly and build its franchise over the past few years. "Tata Capital leverages the Tata Group's ecosystem for lending to suppliers of Tata Group companies," it said.

"We believe Indian finance companies face greater industry risk than banks because they generally have no access to central bank funding." While the regulations for finance companies are tightening, the sector remains subject to less onerous regulations, notwithstanding some requirements on capital adequacy, liquidity, and asset quality management, S&P said.

Tata Capital is among the 10 largest finance companies in India, although its market share in the overall financial sector is small at 0.6-0.7%. The company has a granular and diversified loan book, with more focus on the retail asset class. Its profitability, with a return on adjusted assets of about 2.1% in the first half of fiscal 2024 (annualised), is comparable to the industry average, S&P said.

Tata Capital's capitalisation will likely remain strong despite projections of above-average loan growth. "We forecast its risk-adjusted capital ratio will be about 10% over the next two years, improving from 8% as of March 31, 2023."

Tata Capital will benefit from regular capital infusions from the parent to support growth, the sale of stakes in other group companies, and a conservative dividend strategy. Also, the Reserve Bank of India requires large finance companies to get listed on an Indian stock exchange by September 2025. The capital issuance will further strengthen its capital buffer, the ratings agency said.

Tata Capital has better funding access at competitive rates relative to peers. It has a high reliance on commercial paper. Such paper accounts for about 8% of its total borrowing, compared with 3% for the industry, S&P noted.

The stable outlook on Tata Capital reflects S&P Global's view that the company will continue to benefit from being part of the Tata Group. Tata Capital's linkages with a strong brand should help the company solidify its market position while maintaining a good capital position and average asset quality over the next two years, it said.

"We do not see any upgrade potential for Tata Capital in the next two years. An upgrade would require an improvement in the company's financial profile as well as a higher sovereign credit rating in India," S&P said.