Tata Capital Limited - NCD

TATA CAPITAL LIMITED

Tata Capital Limited is a subsidiary of Tata Sons Limited. The company is registered with the Reserve Bank of India as a systemically important Non Deposit Accepting Non Banking Financial Company (NBFC) and offers fund and fee-based financial services to its customers. The company was incorporated on March 8, 1991 and actively commenced business operations since September, 2007.

A trusted and customer-centric, one-stop financial services provider, Tata Capital Limited caters to the diverse needs of retail, corporate and institutional customers, directly or indirectly, through its subsidiaries across various areas of business namely the Commercial Finance, Investment Banking, Private Equity, Infrastructure Finance, Securities, Wealth Management, Consumer Loans, Cards and Travel Related Services. Tata Capital is headquartered in Mumbai and has a wide network of over 100 branches spanning all critical markets in India. For corporate structure of Tata Capital Limited refer Appendix II.

“WE ONLY DO WHAT’S RIGHT FOR YOU”

The essence of brand Tata Capital is encapsulated in their brand proposition – it reflects their strong resolve to deliver financial solutions that are ‘right’ for their customers and the society at large.

SUITE OF PRODUCTS OFFERED –

Tata Capital offers suite of products across multiple financial domains. For business lines, as carried out by the company and its subsidiaries refer Appendix III.

· Commercial Finance

· Wealth Management

· Consumer Loans

· Forex Services

· Tata cards

· Travel Related Services

· Investment Banking

· Private Equity

· Infrastructure Finance

PURPOSE OF ISSUE

Public issue of secured Non-Convertible Debentures (NCDs) aggregating Rs 5,000 Mn. with an option to retain over-subscription of Rs 10,000 Mn. for issuance of additional NCDs. For Issue details and Issue structure refer Appendix IV and Appendix V.

A NCD (Non Convertible debenture) is essentially a debt instrument with a fixed tenure that pays a certain rate of interest monthly, quarterly, annually or at the end of the tenure. The money invested is returned either over the tenure of the investment or at the end of the tenure

For the above issue the coupon rate from 11-12% was available in four options. The issue had a lock-in period of 36 and 42 months depending on the option chosen. The company had a right to redeem post 36 and 42 months depending on the option chosen. No long-term capital gains were to be levied if held over one year and sold through the exchange medium.

OBJECTS

The funds raised through this Issue, after meeting the expenditures of and related to the Issue, were to be used for various financing activities including lending and investments, to repay existing loans and business operations including that for capital expenditure and working capital requirements.

INTERIN USE OF PROCEEDS

The management of the company, in accordance with the policies formulated by it from time to time, would have flexibility in deploying the proceeds received from the Issue. Pending utilization of the proceeds out of the Issue for the purposes described above, the company also intended to temporarily invest funds in high quality interest bearing liquid instruments including money market mutual funds, deposits with banks or temporarily deploy the funds in investment grade interest bearing securities as approved by the Board. Such investment would be in accordance with the investment policies.

RATING

Rating agencies like ICRA and CARE had assigned LAA+ and AA+ rating to the NCD. ICRA rating of LAA+ indicated high-credit quality and low credit risk and rating by CARE of AA+ indicated high safety for timely servicing of debt obligations.

PERFORMANCE ANALYSIS OF COMPANY

ISSUE ANALYSIS

In order to analyze whether investing in the issue would have be a prudent investment strategy, comparison has been made between Tata Capital Limited and its peers thus identifying various advantages and drawbacks.

ADVANTAGES

§ WELL CPITALIZED - Despite risk of higher NPA’s that the company faced in light of the slowing economy, it was adequately capitalized. The company was subject to the capital adequacy requirements prescribed by the RBI where it was required to maintain a minimum ratio of 10% as prescribed under the Non-Banking Financial norms in 2007 however the company had a Capital adequacy ratio (CAR) of 26.1% as on September 2008.

§ LOWER LEVERRAGE - The company had a debt to equity ratio of 2.7 times as on September 2008. This was quite low as compared to other finance companies which have debt equity ratio in the range of 5-8 times. Also the company intended to repay a portion of the debt with the issue proceeds thereby lowering cost for the company.

§ TATA BRAND - TCL in owned 100% by Tata Sons Limited. The company could grow by leveraging the strength of the “Tata” brand and by exploiting the synergies with other Tata Group companies.

§ LIABILITY MANAGEMENT - Sources of funds for the company mainly were in the form of loan funds from bank and commercial papers. Through this issue, the company would be able to diversify its sources of funds which in turn would result in better asset- liability management.

AREAS OF CONCERN

§ LOSSES IN THE PAST - The company had incurred a net loss of Rs. 2273 lakhs (before tax) for the nine months period ended December 31, 2008. The loss upto September 2008 was only Rs 299 lakh which imply that the company has incurred a loss of Rs.1974 lakh in the last quarter ending December 2008. According to the company these losses were due to the prevailing market conditions and high cost of borrowing. It the company continued to incur further losses, the company’s results of operations and financial condition would be adversely affected.

§ ASSET QUALITY - As on September 2008, the company had a loan book of Rs.68280 mn, out of which loans to construction equipment and SME formed approximately 70% of the loans. Any slowdown in industrial activity was likely to expose the loan book of TCL to a higher credit risk. This would in turn lead to an increase in the number and value of company’s NPA.

§ LIMITED OPERATING HISTORY - Although the company was incorporated in 1991, active commencement of business operations began only in September, 2007. As a result, there was limited historical financial and operating information available to evaluate its past performance. The return that the company had generated in the past from advances and investments stood at 8.5% and 8.6% respectively in FY08.Also the cost of funds stood at 8.3%. Moreover because of limited operating history, the historical financial results could not have accurately predicted its future performance, therefore making it difficult for prospective investors to evaluate its business.

Ratios	2007-08	2008-09
Cost of funds	8.30%	9.40%
Yields on loans	8.50%	12.10%
Yield on investments	8.60%	3.20%

§ DETAILS ON DEPLOYMENT OF ISSUE PROCEEDS - The company had indicated that the funds raised through the issue would be used for its various financing activities including lending and investments, to repay its existing loans and for future capital expenditures, however the company had not given any details with respect to the same.

NPA (NON PERFORMING ASSETS)

Net non-performing assets were Rs.5,364 lakhs representing 0.6% of gross value of customer assets as at March 31, 2009 as compared to Rs.1,445 lakhs representing 0.4% of gross value of customer assets as at March 31, 2008. The Company commenced its operations actively only in September 2007. Therefore with the growth of the business, the number and value of NPAs has increased as large part of the portfolio was not seasoned and has resulted in increased provisioning towards the NPAs.

Going forward it may be difficult for the company to control or reduce the number of NPAs due to adverse global and domestic economic conditions and a prolonged recession period. The company may not be able to improve its collections and recoveries in relation to its existing NPAs. The company’s inability to control or reduce the number and value of its NPAs may lead to deterioration of the quality of its loan portfolio and may severely impact its business.

(NPA) Ratios:	Six months ended March 31		Year ended March 31
Year	2009	2008	2009	2008
Gross NPA	-	-	7,730	2,191
Net NPA	-	-	5,364	1,445
% of Gross NPA to gross advances	-	-	0.95%	0.64%
% of Net NPA to net advances	-	-	0.66%	0.42%
Return on Assets	0.02%	0.16%	0.06%	0.65%

(NPA) Ratios:	6 months ended March 31			Year ended March 31			6 months ended Sept 30
Year	2011	2010	2011		2010	2011		2010
Gross NPA	15,216	23,876	15,216		23,876	18,351		22,187
Net NPA	11,293	17,961	11,293		17,961	13,340		16,063
% of Gross NPA to gross advances	1.02%	2.23%	1.02%		2.23%	1.12%		1.78%
% of Net NPA to net advances	0.76%	1.69%	0.76%		1.69%	0.82%		1.29%
Return on Assets	0.16%	0.10%	0.43%		0.43%	0.40%		0.32%

DEBT EQUITY RATIO

Particulars	2007-08	Prior to the Issue (Sept 30,2008)	2008-09	2009-10	2010-11
Secured loans	1356	209,439	701,475	656,692	877,967
Unsecured loans	921	351,948	240,389	327,902	501,501
Total Debt	2277	561,387	941,864	984,594	1,379,468
Share capital	1987.6	208,762	208,762	209,349	249,515
Reserves	19.3	2,231	2,288	7,502	14,672
Less:Misc. expenditure	0	275	0	0	0
Total Shareholders Fund	2,007	210,718	211,050	216,851	264,187
Debt Equity Ratio	1.13	2.66	4.46	4.54	5.22

Prior to the issue, debt equity ratio is 2.66 as on Sep 30, 2008. The debt equity ratio prior to this Issue is based on a total outstanding debt of Rs. 5614cr and shareholder funds amounting to Rs. 2107cr. The debt equity ratio post the Issue (2008-09) has gone up to 4.46 times, based on a total outstanding debt of Rs. 9419cr and shareholders fund of Rs. 2110cr. Over the years the debt equity ratio of the company has risen however this is still low as compared to its peer groups (except for SIDBI) as shown in the table below. Therefore, it has room to raise more debt and grow its business aggressively in the future.

Debt Equity Ratio of Peer Group
Company	Debt Equity Ratio
TATA CAPITAL LTD	5.22
DEEWAN HOUSING FIN LTD	8.89
HDFC LIMITED	7.22
HUDCO	5.45
LIC HOUSING FIN LTD	10.87
NATIONAL HOUSING BANK	9.67
PNB HOUSING FINANCE	11.07
SIDBI	2.48

EARNINGS

The company is actively operating since Sep, 2007 hence TCL’s profitability has remained under pressure in the short to medium term, this would be the case until the operating income is large enough to absorb initial high fixed overhead expenses incurred on setting up the infrastructure. Profitability of the company could also improve as the non-fund based businesses of the company, such as insurance distribution, merchant banking and financial advisory scale up. Business per employee shall also increase in coming months with the diversification of the business that will further reduce cost.

However, the ability of TCL to maintain reasonable risk adjusted returns would be linked to the level of control it maintains over delinquencies on its loan portfolio.

Despite the expected pressure on profitability, TCL’s strategic importance to the Tata Group, in its position as a key financier within the Tata Group apart from Tata Motors Finance Limited (TMFL), which finances only Tata Motor Limited (TML) assets would ensure strong support from the Group.

For financial results of Tata Capital Limited refer Appendix VI.

CAPITAL ADEQUACY RATIO

Tata Capital Limited is subject to the capital adequacy requirements prescribed by the RBI. Prior to the issue they were required to maintain a minimum ratio of 10% as prescribed under the Non-Banking Financial (Non-Deposit Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 (as amended from time to time) based on total capital to risk weighted assets. As per the RBI circular for NBFC-ND-SI, this limit was increased to 12% by March 31, 2009 and to 15% by March 31, 2010. As a part of Tata Capital’s governance policy, they ordinarily maintain capital adequacy higher than the statutorily prescribed CAR. CAR as on March 31, 2008 and as on September 30, 2008 was 45.5% and 26.1% respectively. The company has maintained capital adequacy higher than the statutorily prescribed CAR which reflects low credit risk. Tata Capital’s credit rating, risk containment measures and brand value will help them to access capital on relatively favourable terms.

Analytical Ratios	Six months ended March 31		Year ended March 31
Year	2009	2008	2009	2008
Capital Adequacy Ratio	-	-	17.06%	45.52%
Basic EPS	0.01	0.06	0.06	0.22
Diluted EPS	0.01	0.05	0.02	0.19

Analytical Ratios	6 months ended Mar 31		Year ended Mar 31		6 months ended Sept 30
Year	2011	2010	2011	2010	2011	2010
Capital Adequacy Ratio	17.80%	21.44%	17.80%	21.44%	16.82%	17.80%
Basic EPS	0.13	0.09	0.36	0.43	0.29	0.25
Diluted EPS	0.12	0.06	0.33	0.24	0.28	0.21

CONCLUSION

Tata Capital's Public Issue of NCD received an overwhelming response - Based on subscriptions of over Rs 3,000 crore received, the Issue was over subscribed by more than six times. The Rs. 500 crore Issue had an option for the Company to retain an additional Rs 1,000 crore. Tata Capital had decided to retain total subscriptions of Rs.1,500 crore, which was upto the rated amount. The issue gained significant acceptance and this re-instated the investors’ confidence in Tata Capital.

As stated in the issue purpose proceeds of the NCD’s were utilized towards Issue expenses, repayment of existing loans and for financing activities including lending and investments.

Particulars of the proceeds of the NCDs and its utilization are as under:

Particulars	2009-10	2008-09
Opening Balance of unutilized proceeds	26,178	-
Amount received out of issue of debentures	-	150,000
Less: Issue expenses	-	5,661
Net Proceeds	26,178	144,339
Utilization of funds
Financing activities including lending and investments	11,178	50,661
Repayment of existing loans	15,000	67,500
Total	26,178	118,161
Balance unutilized proceeds have been temporarily invested in Fixed deposits with the banks	NIL	26,178
Total	Nil	26,178

Going forward, the company’s strategy is to consolidate its existing lines of business, explore new business opportunities, pursue strategic acquisitions and alliances, leverage its technology advantage, attract and retain talented professionals and expand client base and geographical presence. Based on the good response that the NCD issue had generated, such bonds have become an instrument of choice for investors and other corporates leading to the development of a strong corporate bond market.

APPENDIX I - CLASSIFICATION OF INSTRUMENTS TRADED IN DEBT MARKET

Market Segment	Issuer	Instruments
Government Securities	Central Government	Zero Coupon Bonds, Coupon Bearing Bonds, Treasury Bills, STRIPS
	State Governments	Coupon Bearing Bonds.
Public Sector Bonds	Government Agencies / Statutory Bodies	Govt. Guaranteed Bonds, Debentures
	Public Sector Units	PSU Bonds, Debentures, Commercial Paper
Private Sector Bonds	Corporates	Debentures, Bonds, Commercial Paper, Floating Rate Bonds, Zero Coupon Bonds, Inter-Corporate Deposits
	Banks	Certificates of Deposits, Debentures, Bonds
	Financial Institutions	Certificates of Deposits, Bonds

APPENDIX II – CORPORATE STRUCTURE OF TATA CAPITAL LIMITED

APPENDIX III - BUSINESS LINES CARRIED OUT BY COMPANY AND ITS SUBSIDIARIES

Name of Entity	Fund based business	Fee based business
Tata Capital Ltd	SME finance, Infrastructure finance, Retail finance	Private Equity, Wealth Management and Portfolio Management Services
Tata Capital Markets Ltd	-	Merchant Banking
Tata Securities Ltd	-	Retail broking and Distribution Depository Services
Tata Capital Housing Finance Ltd	Housing finance	-
TC Travel and Services Ltd	-	Travel and Forex
Tata capital Pte. Ltd	Corporate finance	Investment Banking, Treasury Centre
Tata Capital Advisors Pte. Ltd	-	Advisory services to funds
Tata Capital Markets Pte. Ltd	-	Investment Advisory Services

APPENDIX 1V – ISSUE DETAILS

Issue Details
Issue Size	Rs 5,000 mn., with a green shoe option of Rs 10,000 mn
Face Value	Option I – Rs. 1,00,000 : Option II, III IV - -Rs.1000.
Minimum Application	Option I – Rs. 1,00,000 : Option II, III IV - -Rs.1000
Ratings	1) ICRA – LAA+ 2) CARE- AA+
Issue Opens	2-Feb-09
Issue Closes	24-Feb-09

APPENDIX V – ISSUE STRUCTURE

Options	I	II
Interest Payment	Monthly	Quarterly
Face Value of NCDs (Rs/NCD)	100000 (Rs)	1000 (Rs)
Mode of Interest Payment	ECS only	Through various options availabe
Coupon (%)	11% per annum	11.25% per annum
Put and call option	36 months	42 months
Tenor	60 months	60 months
Redemption Date	5 years from the deemed date of allotment	5 years from the deemed date of allotment

Options	III	IV
Interest Payment	Annual	Cumulative
Face Value of NCDs (Rs/NCD)	1000 (Rs)	1000 (Rs)
Mode of Interest Payment	Through various options availabe	Through various options availabe
Coupon (%)	12% per annum	12% per annum to be compounded annually
Put and call option	36 months	36 months
Tenor	60 months	60 months
Redemption Date	5 years from the deemed date of allotment	5 years from the deemed date of allotment

APPENDIX VI – FINANCIAL RESULTS - TATA CAPITAL LIMITED

Particulars	6 months ended Mar' 31		Year ended Mar' 31		6 months ended Sept' 30
Year	2011	2010	2011	2010	2011	2010
1. Interest earned	81948	66,076	154,336	132,323	98917	72388
2. Other Income	5,082	1,945	8,132	5,603	5931	3050
3. Total Income (1+2)	87,030	68,021	162,468	137,926	104848	75438
4. Interest expended	53082	40702	98377	84245	65713	45295
5. Operating Expenses	20906	17837	40264	34508	24195	19358
6. Total Expenditure (4+5)	73,988	58,539	138,641	118,753	89908	64653
7. Operating Profit (3-6)	13,042	9,482	23,827	19,173	14940	10785
8. Provisions & Contingencies	9,063	7,217	13,498	11,645	4335	4435
9. PBT	3,979	2,265	10,329	7,528	10605	6350
10. Tax Expense	1,315	1,067	1,067	2,397	3466	1877
11. Net Profit (+)/ Loss (-) (9-10)	2,664	1,198	7,137	5,131	7139	4473

Particulars	6 months ended Mar' 31		Year ended Mar' 31
Year	2009	2008	2009	2008
1. Interest earned	53,325	15,062	85,697	17,798
2. Other Income	3,402	598	3,700	598
3. Total Income (1+2)	56,727	15,660	89,397	18,396
4. Interest expended	42,200	8,655	60,675	9,400
5. Operating Expenses	12,715	6,433	25,510	7,956
6. Total Expenditure (4+5)	54,915	15,088	86,185	17,356
7. Operating Profit (3-6)	1,812	572	3,212	1,040
8. Provisions & Contingencies	1,650	357	2,601	307
9. PBT	162	215	611	733
11. Net Profit (+)/ Loss (-)	175	406	474	921