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Tata Finance: Niskalp effect

Jul 5, 2002

Tata Finance' losses increased sharply in the March quarter on account of a steep decline in income from operations and higher borrowing cost. For the year ended March 2002, Tata Finance provided Rs 396 m as deferred tax asset which cut down its losses. The company shifted its financial year end to March from June. Consequently, we have compared the nine months performance of the company for analysis purpose.

(Rs m) MQ FY01 MQ FY02 Change July-March '02 July-March '02 Change
Income from Operations 1,402 1,032 -26.4% 4,237 3,287 -22.4%
Other Income 56 58 3.4% 184 153 -16.4%
Interest & depreciation 944 795 -15.8% 3,135 3,000 -4.3%
Net interest income 458 237 -48.2% 1,103 287 -74.0%
Other Expenses 404 353 -12.6% 787 616 -21.7%
Operating Profit 54 (116) - 316 (329) -
Operating Profit Margin (%) 3.8% -11.2%   7.5% -10.0%  
Provisions and Contingencies 56 36 -35.0% 227 279 22.6%
Profit before Tax 53 (95) - 272 (454) -
Extraordinary items - (746) - - (1,116) -
Tax 9 (397) - 40 (396) -
Profit after Tax/(Loss) 44 (444) - 232 (1,175) -
Net Profit Margin (%) 3.2% -43.0%   5.5% -35.7%  
No. of Shares (m) 45.5 266.5   45.5 266.5  
Diluted Earnings per share* 0.7 -6.7   1.2 -5.9  

For the nine months ended March '02, Tata Finance' net income declined by 74% on the back of higher interest cost. Rising operating expenses (mainly staff cost) resulted in the company making operating loss of Rs 329 during the period July to March 2002, as against operating profits of Rs 316 m in the comparable previous period. The company's business has been severely impacted after the fiasco of its wholly owned subsidiary Niskalp Investments. Auditors have qualified the company's accounts with regard to non-compliance with NBFC prudential norms and acceptance of public deposits under the RBI guidelines.The qualifications by the auditors could have a negative impact on the company's future business. The company's net owned funds are below the legally prescribed capital adequacy ratio, and this could be a reason for qualifications. Carrying on business with negative networth (excluding preferance shares) would be tough for Tata Finance.

Tata Finance has initiated a restructuring exercise to revive its business. It aims to focus on its core business of auto finance and exit from all unrelated areas. The company is in the process of disposing off its stake in Tata Finance Amex (card subsidiary) and it has provided for the estimated loss in this respect. Extraordinary item of Rs 1.1 bn represents provision against exposure to inter corporate deposits, permanent diminution in value of long term investments and refund of dividend to an erstwhile subsidiary.

The company's stock price has witnessed a sharp rise from the level of about Rs 20 in February '02 to Rs 32 currently. Its restructuring efforts have enthused investors. However, Tata Finance, being a non-banking finance company (NBFC) is facing stiff competition from banks in retail finance. Banks, with comparatively low cost funds, offer loans at a much competitive rates than NBFCs. Its nearest competitor Kotak Mahindra has received RBI's approval for converting into a bank. This will also pressurize the company's business in the coming years. The company, which traditionally enjoyed premier status in auto finance market is likely to face more challenging business conditions in the coming years notwithstanding its expertise in this segment.

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