Tata motors to merge its vehicle financing subsidiary with Tata Capital: Report

Tata Motors is planning to separate its vehicle financing subsidiaries that operate under Tata Motors Finance and merge it with Tata Capital to streamline its operations and deleverage its balance sheet, reported The Economic Times. This also comes at a time, when Tata Capital is planning an IPO by the end of this year.

Tata Motor's NBFC arm spin-off

As per The Economic Times, the process will involve a share-swap agreement. Group holding company Tata Sons will offer shares of Tata Capital to Tata Motors. This will give India’s third-largest carmaker by volume a minority stake in Tata Capital.

The report further revealed that the valuation of Tata Motors Finance is estimated to range between Rs 15,000 crore to Rs 20,000 crore, translating to 2.6 to 3.5 times its FY23 book value of Rs 5,625 crore. A formal agreement is expected to be announced soon. Bank of America is reportedly advising Tata Motors in the agreement.

Tata Capital is a 95% subsidiary of Tata Sons and the flagship financial services company of the conglomerate. Its products include commercial finance as well as consumer, home, education, personal and car loans. It also offers loans against property, wealth services, private equity and the distribution and marketing of Tata Cards.

As per RBI, Tata Capital Financial Services and Tata Sons are treated as 'Upper layer' non banking finance companies (NBFC) and are required to list by September 2025. Hence for Tata Capital, this recast is part of streamlining the financial services portfolio of the group under a single entity.

For Tata Motors it will help deleverage its balance sheet at a time it’s rationalising its own operations by demerging the passenger and commercial vehicles businesses. Tata Motors can unlock value by monetising Tata Capital shares during the listing for a significant upside after the merger.

The gross debt will also be brought down for Tata Motors. About 35% of that is the net automotive debt (Rs 43,700 crore), providing clarity on the leverage. It will also reduce the drag on consolidated financials during the downcycle in commercial vehicles, typically resulting in higher provisions.

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