Share Market Highlights 21 August 2023: Sensex gains 267 pts, Nifty ends at 19,393; Jio Financial Services loses 5%

InCred Equities on Jio Financial Services Limited

Not Rated | TP: NA

The euphoric valuations are here to stay

1. Jio Financial Services (JFS), which was demerged from Reliance Industries Ltd (RIL), will be listed on Indian stock exchanges on August 21, Monday. RIL shareholders as of the record date of July 20 has received share of Jio Financial Services in the ratio of 1:1. The value of Jio Financial Services share price was derived at ₹261.85 after the special pre-open call auction session held on July 20, valuing the company at Rs1.67tn.

2. The net worth of JFS as on March’22 is Rs280bn, including Rs170bn paid for the treasury share of RIL. Thus, core net worth is Rs110bn. At discovered price, excluding the current value of investments (~6.1% stake in RIL) worth Rs1tn, the core business valued at ~6x trailing BV. We expect such euphoric valuations to hold for a while amid expectation of robust organic growth as well as probable opportunities of inorganic growth available in the financial domain.

3. JFS can opt for wide variety of financial service business including the lending business, digital broking, insurance, mutual funds, payments, etc. However, we do not remain alarmed towards threat for existing players as we believe loan origination through existing set of customers is important however other factors such as cost of funds, appropriate risk assessment as well as prudent recovery mechanism also plays an important role for the success of a lender.

Demerger remains a complex business – Treasury share of RIL is the key

Various financial services businesses across RIL and its group companies are being demerged and transferred to Reliance Strategic Investments Ltd (RSIL), a non-banking financial company (NBFC). RSIL, now a subsidiary of RIL, runs a relatively small -trading business. After the demerger exercise, RSIL will no longer be a subsidiary of RIL and instead issue its own shares to RIL’s shareholders. Also, RSIL will be renamed to Jio Financial Services (JFS). Through the demerger, Jio Financial Services will receive ~413mn treasury shares of Reliance Industries Limited (~6.1% of the total share capital). At the current market price, the value of these shares is Rs 1tn. JFS can sell these shares in a staggered manner, or also simply hold on to them. Either way, its capital base will get a boost; and like other NBFCs, JFS could use it to leverage (borrow) significantly for the lending business

The valuation dilemma – To hold or not to hold is the question?

The net worth of JFS as on March’22 is Rs280bn, including Rs170bn paid for the treasury share of RIL. Thus, core net worth is Rs110bn. The value of Jio Financial Services share price was derived at ₹261.85 after the special pre-open call auction session held on July 20, valuing the company at Rs1.67tn. At discovered price, excluding the current value of investments (~6.1% stake in RIL) worth Rs1tn, the core business valued at ~6x trailing BV. We expect such euphoric valuations to hold for a while amid expectation of robust organic growth as well as probable opportunities of inorganic growth available in the financial domain.

Ample scope for growth – Threat to existing lenders is a myth

Jio Financial Services (JFS) can opt for wide variety of financial service business including the lending business, digital broking, insurance, mutual funds, payments, etc. RIL’s captive base of millions of customers in telecom, retail, and other businesses will be the basic channel for growth. However, we do not remain alarmed towards threat for existing players including smaller NBFCs or banks as we believe loan origination through existing set of customers is important however other factors such as cost of funds, appropriate risk assessment as well as prudent recovery mechanism also plays an important role here. Besides, JFS will be up against formidable players including large banks, NBFCs, Insurance companies and mutual funds which are well equipped with modern technology, efficient manpower and well spread presence. Lastly, India Financial Services business is efficiently regulated by the Reserve Bank of India which will ensure avoiding any severe under cutting else creating monopolistic market environments in any of the lending segments.

June quarter performance – Profitable quarter however long way to go to achieve sizable business

Reliance Strategic Investments Limited (to be renamed as Jio Financial Services or JFS) has reported June quarter results. The demerged entity of Reliance Industries said its consolidated net profit after tax for the first quarter stood at Rs3.3bn against a total income of Rs4.1bn. On a standalone basis, net profit for the quarter came in at Rs 1.5bn and total income at Rs 2.1bn. Thus, the company is in the initial phase of operations and has long way to go to achieve sizable profitability from its financial services business.