Planned merger broadens TCL’s diversity, auto-market exposure

Underwriting criteria may be tightened to combat integration risks.

The planned merger between Tata Capital Limited (TCL) and Tata Motors Finance Limited (TMFL) will broaden TCL’s product diversity and customer reach, according to Fitch Ratings.

TCL, an India-based financial services provider, will be the surviving entity of the merger, which is expected to be completed in the next 10-12 months. 

A notable effect of the merger is that it will raise TCL’s vehicle financing portfolio to 27% of consolidated gross loans, compared to just 12% at end-March or pre-merger.

Whilst TCL’s exposure to the auto-lending industry will be enlarged, its overall loan book should still remain diversified: non-vehicle retail loans will make up 42% of the total loans, corporate exposures will account for 11%, and the remaining 20% will be loans extended to small and medium enterprises (SMEs), according to Fitch.

A broader customer base and an extended branch network will also raise TCL’s competitive position in vehicle financing.

“The two vehicle loan portfolios are also complementary. TCL predominantly finances construction equipment, second-hand cars and two-wheelers, whilst TMFL's exposure is concentrated on commercial vehicles and new passenger vehicles, primarily sold by Tata Motors,” Fitch said.

TCL is not expected to depart from its strategy of conducting vehicle financing on an “arm's-length commercial basis.” 

“Major third-party financial institutions already offer financing for Tata Motors’ products, and we expect TCL to similarly compete for such business–albeit with the reputational and operational advantage of being part of the Tata group,” the report added0. 

One challenge that the merger faces is that the two entities have different operating platforms. This presents integration risks. However, Fitch expects Tata’s management to be able to navigate through the issues adequately.

Another risk is TMFL’s higher non-performing and restructured loan ratio. This may weigh on TCL’s reported asset quality post-merger. Management is expected to tighten underwriting criteria to strengthen credit quality over the next few years.

“There may be some repositioning of TMFL’s loan mix as management fine-tunes its vehicle lending strategy, but any run-off should be offset by growth in the rest of TCL’s portfolio,” Fitch said.

“We also do not foresee any dramatic shifts in profitability, leverage or the funding profile, such that our view of TCL's stand alone credit profile remains broadly intact,” it added.