Motilal Oswal initiates coverage on Tata Capital, gives target price and re-rating triggers

Motilal Oswal has initiated coverage on Tata Capital with a ‘Neutral’ rating and a target price of Rs 390, valuing the stock at 2.7x its estimated March 2028 price-to-book value (P/BV). The target implies an 8% upside from the current market price of Rs 361.

The brokerage said a meaningful re-rating would require sustained improvement in return on assets (RoA) and return on equity (RoE), supported by continued expansion in higher-yielding retail lending segments.

While it expects the company to deliver healthy AUM growth and gradual improvement in profitability over the medium term, it also believes current valuations adequately reflect these positives. The AUM is expected to grow at a CAGR of 23% over FY26-28E.

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The company’s margins are expected to gradually improve as the portfolio mix shifts further toward retail and unsecured lending, with NIMs increasing to nearly 5.4%/5.5% in FY27E/FY28E.

While credit costs increased following the TMFL merger due to stress in the Motors Finance and select unsecured portfolios, asset quality trends have improved meaningfully, with Motors Finance returning to profitability in 4QFY26, the credit costs is expected to normalize further and moderate to nearly 1.1% of AUM over FY27E-FY28E.

Tata Capital benefits from a strong liability franchise, supported by Tata Group parentage and a AAA credit rating which enables access to funding at competitive costs. The brokerage expects margins to gradually improve as the portfolio mix shifts further toward retail and unsecured lending, with NIMs increasing to nearly 5.4%/5.5% in FY27E/FY28E from approximately 5.2% in FY26.Its NIM moderated in FY26 due to slower growth in unsecured lending and the continued runoff of the motor finance portfolio. However, improving disbursement trends in unsecured segments and the turnaround of the motor finance business are expected to support margin recovery from FY27

As the company has displayed disciplined cost control measures through digital initiatives, process improvements, and branch-level productivity. As new branches scale and technology matures, productivity gains are expected to enhance efficiency. The cost-to-income of the company is estimated at 35%/33% and opex-to-average assets of 2.1%/2.0% in FY27/FY28.

The company is the third-largest diversified NBFC in India with a total AUM of Rs 2.77 trillion as of Mar’26. It is among the fastest-growing large diversified NBFCs, with total AUM (excluding Tata Motors Finance business) recording a strong CAGR of nearly 29% between FY23 and FY26.

The company has displayed consistent growth while maintaining healthy asset quality, reflected in a GS3 of 2% and NS3 of 0.9%, which is among the best within the large, diversified NBFC peer set as of Mar’26.

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Motilal Oswal said that while Tata Capital’s outlook remains favourable, it believes the current valuation adequately reflects the company’s medium-term growth and earnings potential.

Motilal Oswal expects healthy growth momentum across the retail, SME, auto, and housing segments, with housing likely to remain the key growth driver, followed by retail, SME, and the emerging/mid-corporate businesses.

(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of The Economic Times)