Prime pick: TATA Finance Ltd.
['Find purpose, the means will follow']
Company Website.
tata.com
TATA Finance Ltd - Firmly stepping ahead
Rajiv Goel (Investor's Guide,ETonline-Aug.30-Sept.04))
GROWTH in business of non-banking financial companies (NBFCs) is a precursor to economic growth. On the bourses, NBFC scrips have historically led the rally among the mid-cap stocks. While NBFC scrips have shown a bubbling on the bourses, mid-cap stocks have risen by a far higher percentage. We believe that if sectoral indicators point to good economic growth, NBFCs will receive a boost in their financial performance.
Tata Finance Ltd (TFL), one of the largest NBFCs in India, is diversifying its portfolio and activities. It is one of the cheapest (in terms of PE) scrips available. It has come out with innovative structures to finance consumer durables and is set to introduce a host of new ventures.
Operations
TFL's business portfolio comprises fund and fee-based activities besides trading, investment and broking. Significant part of income comes from fund-based activities. Almost 65 per cent of income comes from truck financing business. Around 15-20 per cent comes from financing cars and 10 per cent from corporate financing and leasing activities.
TFL has the largest number of members in the bankers consortium and highest bank limits assigned to any finance company in India. The entire borrowing is done without any guarantee or letter of comfort from any Tata group companies. As of June 1999, TFL?s bank limits which stood at Rs 915 crore (highest among the Tata group companies) are being augmented to over Rs 1000 crore. Borrowings from FDs stood at Rs 930 crore as of June 1999 and is slated to cross Rs 1000 crore this fiscal. It?s FDs come at one of the lowest rates in the country. With key strengths in servicing, innovation and high technology, it enjoys the highest fixed depositor base.
It has preference capital of Rs 100 crore at a rate of 11 per cent. Last fiscal, TFL issued convertible preference shares of Rs 40.81 crore on a rights basis. About Rs 334 crore came from inter-corporate deposits (ICDs) as of June 1999. Cumulatively, TFL raised ICDs worth Rs 3028 crore and returned ICDs of Rs 3011 crore last fiscal.
Bills re-discounted (BRD) was Rs 90 crore as of June 1999. Last fiscal, it raised fresh BRDs of Rs 1330 crore and returned BRDs of Rs 1453 crore. Besides, TFL enjoyed term loans of Rs 83 crore from FIs. Secured and unsecured debentures brought in Rs 155 crore.
Competitive strengths
BESIDES the Tata brand equity, TFL enjoys special support from Telco and its dealers. It is the only financial services company in the group. Geographically, TFL has presence in over 72 cities, enjoys a large client base and market share. It plans to extend its presence to 11 additional locations. It has large investments in IT and systems development and enjoys enhanced resource mobilisation capacity.
Business scenario
NBFCs, nationalised and cooperative banks are the chief truck financing players. Due to faster response time, flexible schemes and good dealer relationships NBFCs wrest the higher share of business. This, despite higher interest rates. TFL sources its business through Telco's dealer network under trade advance and bill marketing schemes. Over 110 Telco dealers help in TFL's truck financing business. Dealers benefit from remuneration earned from TFL in addition to the margin on sale of Telco vehicles. Dealers share the liability of outstanding loans. Dealers have keen in getting trucks financed through TFL as it ensures immediate credit of loan amount to their account, while other finance companies would take two to three days.
TFL canvasses direct business through its own marketing force. With its vast network, it launches regular schemes based on its cost of funds. Dealers do not share any remuneration or liability. TFL provides hire purchase and lease finance for all brands of cars, both new and old. It offers trade advance facility to dealers against liquidation under TFL schemes. It enjoys tie-ups with Telco, Daewoo and Mercedes Benz for value added services on all-India basis.
TFL arranges hire purchase and lease finance for construction equipment and machinery. Under asset financing, it provides trade finance facility to dealers enabling them to make advance payments to manufacturers for lifting vehicles and also bill discounting facility to facilitate dealers make payments for vehicles supplied by manufacturers. TFL helps in infrastructure financing for building workshops and showrooms.
Its inhouse data team develops software for all business and service areas on Oracle platform. It enjoys leased line connectivity with all major branches. Tata Finance Securities Ltd, a member on the BSE and NSE is empanelled with several FIIs and mutual funds for securities business. A primary dealer of securities, it has recorded one of the largest turnover among all primary dealers.
New activities
THANKS to its large network, TFL is set to enter the area of housing finance. It can start this venture any day without incurring any infrastructure costs.
It has forged innovative schemes to finance consumer durables. This could expand the business operations significantly at the least cost. Talks are on with three consumer durable manufacturers.
TFL is getting into the credit cards business. The initial product would be a co-branded card with Amex and/or Mastercard or Visa. Receivables, management, billing and recovery will be handled by the partner bank while TFL will receive fees for enrolment of new members and a percentage of card-spend. In the next phase, it will venture out on its own.
TFL is forming a new JV with Amex for forex services and allied products. The first phase would involve retail and wholesale sale/purchase of TCs/currencies and export of non-dollar currencies and the second, strategic alliances with regional banks. Being an authorised dealer will help TFL get large business from Tata group companies, particularly Tata International. Allied products that may be introduced in this JV include pre-paid telephone cards, corporate cards for travel and entertainment expenses, holiday finance schemes and travel insurance products.
TFL has recently diversified into financing two-wheelers, following a hybrid system-block financing and retail financing. It has identified locations for initiating business. The operation is being run as a separate division, headquartered in Pune. It plans to enter into the insurance business, in association with a large foreign insurance company.
Outlook
TFL is aiming to place 25 per cent of its equity of Rs 10 crore with FIIs and other strategic investors, in the price range of Rs 85 to Rs100. With about Rs 85 to Rs 100 crore in its kitty, TFL would be able to borrow Rs 700 crore to Rs 800 crore and augment its lendable resources. Based on its ROCE, TFL would be able to add atleast Rs 15 crore to the bottomline. In the current equity holding pattern, Tata group companies hold 52 per cent of the Rs 40.84 crore equity while Telco dealers 20 per cent, FIs and banks 3 per cent and the public 25 per cent. Tata's shareholding would rise to 72 per cent on conversion of preference shares into equity in March 2002. The average cost of bank borrowings is about 13.5 per cent while the average cost of borrowed funds is 14.5 per cent. It enjoys gross spreads of 3 to 7 per cent. TFL is targeting an EPS of Rs 15-18 (on diluted equity) in the next three years. As of June 1999, capital adequacy stood at 13.86 per cent while net NPAs were 4 per cent. Provisions are Rs 30 crore in excess of RBI norms. Overdues were 8 per cent compared to 10 per cent for Sundaram Finance.
TFL is learnt to be keen on bringing a foreign partner into Tata Finance Securities Ltd. Sale of equity to the foreign partner would result in an additional fund flow of about Rs 50 crore. The company is slated to get an income tax refund of Rs 22 crore. Given the high book value, projected EPS of Rs 25 in FY 2001, low P/E multiple and expanding business activities, TFL is a good medium term buy with a target price of Rs 150. |
