The automobile industry — both commercial vehicle and passenger cars — has seen a robust increase in volumes. Tata Finance has benefited from the upsurge. In the first half of 2003-04, commercial vehicle disbursements rose 50 per cent.

Re-organisation of the assets portfolio has also helped. Tata Finance has consistently been selling its lease assets and also securitising (selling the loans as part of a portfolio) its hire-purchase loan assets. Italso sold its stake in Tata Home Finance to IDBI during this period.

Income from operations fell by about 20 per cent in the first nine months of 2003-04 because of the sale of assets.

This is, however, not a major cause for concern as the cash generated from the sold assets can be used to repay high-cost loans. This programme of sell-off of loan assets is expected to continue even in 2004.

For instance, Tata Finance recently entered into an agreement to sell its two-wheeler loans to ICICI Bank. The infusion of Rs 300 crore by the Tata group and the mobilisation of Rs 150 crore as preference shares would also have helped reduce interest costs. This is seen in the 40 per cent drop in interest expenses.

The sharper fall in interest outgo relative to inflows also boosted net interest income by about 50 per cent, signalling the turnaround in the fortunes of Tata Finance.

Stiff valuations

Tata Finance is in the midst of a restructuring exercise. Its financial performance does not reflect what it is capable of producing.

At `steady-state', the company's financials would appear much better. The valuations, however, do not appear justified, even taking into consideration these likely changes.

The funds employed by Tata Finance at end-March 2003 were about Rs 2,523 crore. A net interest margin of 5 per cent is possible for a NBFC such as Tata Finance. Such a margin would produce a net interest income of about Rs 125 crore.

Even if the net interest income were to swell to such a level, the earnings per share could just be less than Rs 5 because of the expansion in equity and the need to service the preference share capital.

Even from a return on net worth perspective, the valuations do not appear attractive.

The net worth, as at end-March 2003, was about Rs 900 crore, without considering the debit balance in the profit and loss account. A return on net worth of about 15 per cent would still produce earnings per share of only about Rs 5.

Importantly, continuing improvement in the financial performance and reaching a return of net worth of about 15 per cent are fraught with risks. These factors suggest that a market capitalisation of about Rs 700 crore is on the high side. Investors can sell the stock now and buy it at lower levels.