Tata Motors Plans NBFC Spin-off, Merger with Tata Capital Before IPO Launch

Tata Motors has planned to de-merge its vehicle financing subsidiaries, which are currently operating under Tata Motors Finance Ltd, and merge them with Tata Capital ahead of its IPO. This would, according to a May 10 report in The Economic Times, smoothen its operations and help reduce its debt load.

The proposed merger would be a share-swap deal under which Tata Sons, the parent holding company of the group, would swap Tata Capital shares with Tata Motors. Under the deal, details of the report reveal, India's third-largest car maker by volume will get a minority stake in Tata Capital.

According to the report, the valuation of Tata Motors Finance is projected to fall within the range of ₹15,000 crore to ₹20,000 crore, which corresponds to approximately 2.6 to 3.5 times its book value of ₹5,625 crore for the fiscal year 2023. This valuation presents a significant premium compared to the assessments provided by equity analysts covering Tata Motors. An official announcement regarding a formal agreement is anticipated in the near future, with Bank of America reportedly serving as an advisor to Tata Motors throughout the negotiation process.

Tata Capital, serving as the flagship financial services entity of the conglomerate, operates as a 95% subsidiary of Tata Sons. The diverse array of products it offers encompasses commercial finance alongside consumer, home, education, personal, and automobile loans. Additionally, Tata Capital extends services for loans against property, wealth management, private equity, and facilitates the distribution and marketing of Tata Cards.

Under the guidelines of the Reserve Bank of India (RBI), both Tata Capital Financial Services and Tata Sons are classified as 'Upper layer' non-banking financial companies (NBFCs) and are mandated to be listed by September 2025. Consequently, this restructuring initiative for Tata Capital is integral to consolidating the financial services portfolio of the conglomerate under a unified entity.

The restructuring of Tata Motors' financial subsidiaries, particularly the merger with Tata Capital, presents an opportunity to streamline its balance sheet and reduce debt burdens, coinciding with its efforts to streamline operations through the demerger of its passenger and commercial vehicle businesses. By monetizing its shares in Tata Capital during the listing process, Tata Motors stands to unlock considerable value, potentially realizing significant upside following the merger.

The integration of Tata Motors' financial subsidiaries is poised to reduce the gross debt burden for the company. Specifically, approximately 35% of this debt, amounting to ₹43,700 crore, constitutes net automotive debt, thereby offering clarity on the leverage situation. This consolidation is expected to alleviate the strain on consolidated financials, particularly during downturns in the commercial vehicle sector, which often necessitate higher provisions.

From Tata Capital's standpoint, this restructuring initiative is a pivotal step in rationalizing the financial services portfolio within the group, aligning with its strategy of consolidating operations under a unified entity in preparation for its anticipated IPO in 2024-25.

During the fiscal year 2022-23, the Tata Motors Finance (TMF) group facilitated disbursements amounting to ₹18,334 crore for vehicle financing. As per the Tata Motors annual report, approximately 17% of commercial vehicle sales in India during the same period were facilitated by dealers who had financing arrangements with Tata Motors Finance.

In terms of financial performance, TMF reported revenue of ₹4,927 crore for FY23. However, the company incurred a loss of ₹993 crore, contrasting with a profit of ₹101 crore in FY22. This shift can be attributed to heightened provisioning for finance receivables post-pandemic, reflecting the challenges faced in managing credit risk amid economic uncertainties.

Since January 2015, Tata Motors Finance has strategically shifted its focus to the used-vehicle finance segment of Tata Motors. The company offers a diverse range of solutions, including fuel loans, with the overarching goal of expanding its market presence and catering to the evolving needs of customers in the used-vehicle finance domain.