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Another “Jio” Moment?📈

While you’re reading this blog from start to finish, and as you wander onto watching our podcast on Youtube, chances are that you might exhaust about 1 GB of your mobile data at max.

A couple of years ago that might have resulted in you shelling out about Rs. 350, but, cut to now, the same 1 GB costs about Rs. 13 and we’re pretty sure you know who to thank for this blessing - Reliance Jio!

In a matter of 6 years, this force of nature now commands a 40% market share, making it the largest telecom service provider in the nation, beating historic giants like Vodafone-Idea and Airtel - and now, Jio is making another splash in the markets after 20 years, but in a very different game - Jio Financial Services (JFS).

Here is how Jio Financial Services has faired since its listing on 21st August 2023 - the stock is down about 9%, major parts of the business plan haven’t kickstarted yet and the market is confused as to whether they should trust mota bhai’s calibre or push this under the rug.

Can Jio Financial Services pull off another “Jio” moment in a lucrative space?

The “Jio-moment” Checklist

Just as Jio entered the market, disrupted it and left a gaping hole that only it could fill, forcing its peers to kneel to the market forces that Jio bent in its favour, the expectation that comes with the legacy of the name is that Jio Financial Services also follows suit.

But with this pressure comes the need to check off certain key areas where Jio succeeded:

By doing those 3 things, Jio caused a cataclysmic shift in the industry, with monthly data usage of users going from 500 MB pre-Jio to almost 11 GB within 3 years! Coupled with being among the only EBITDA-positive telecom companies among the giants at the time (despite a huge cash burn), Jio carved its place in the market.

Assuming Jio Financial Services does all of those things, it has a real shot at taking on the big guns in the financial services arena that it wishes to capture. With a Rs. 1.4 lakh crore valuation being awarded to a company that basically doesn’t have a business yet, it seems that hopes are riding on all these 3 key areas being nailed.

And yes, it doesn’t have much of a business, but what industries does the company wish to enter and disrupt?

What Is Cooking In The JFS Kitchen?

If you head over to the Jio Financial Services website, you will be presented with a plethora of services that the company offers, but the fact of the matter is, except for basic consumer durable loans and personal loans, the entity is yet to start its business in full swing.

There are namely 2 sectors where there seems to be some value that Jio Financial Services can provide, for customers and shareholders alike, and how it intends to tackle that as a newbie.

1. Lending

Armed with an NBFC license and poised to convert to a CIC (Core Investment Company that is allowed to deal in investments like equities and bonds, making them even cooler), Jio Financial Services plans to take giants like Bajaj Finance head-on in the lending space - and it might just succeed.

While Bajaj is among the top contenders with a whopping Rs. 3 lakh crore in assets, it makes a dent of merely 2-3% in the entire Indian credit market! By this logic, India would need multiple companies like this to service its credit and payment needs - a massive opportunity for a company with resources like Jio Financial Services to capitalise on.

Jio Financial Services has one massive ace up its sleeve - Reliance Group. With access to the 400 million customer base of Jio telecom, more than 700 million customers as a footfall of Reliance Retail (the largest consumer electronics retailer in the country), and a merchant network of more than 2 million (set to hit 10 million in 2 years), Jio Financial Services already surpasses the potential that Bajaj Finance possesses that might be capped at 100 million potential customers at best.

It doesn’t hurt to know that while Jio Financial Services has no dearth of funding (thank you, mota bhai), it just announced a Rs. 10,000 crore debt issue, possibly AAA-rated because of its parent, which is great news because they can have access to low interest rates, thereby beating Bajaj Finance on the debt financing side of things as well.

2. Passive Investing

Here is a surprising statistic - while the world sees an average mutual fund AUM-to-GDP ratio of 74%, India stands at a low 16%. This basically indicates that the trend of investing itself is yet to catch-up with the world, and that there exists a huge gap.

Moreover, the global trend is of passive investing being on the rise as index funds and ETFs sore to popularity. In developed economies like the US or Japan, passive investing has already exceeded active investing, while in India, passive investing still makes up for 17-18% of the total investing pool.

Hence, Jio Financial Services plans to launch its Asset Management business as well, tackling the investing wave, and the passive investing wave. In fact, just this year has seen an increase in passive investing AUM by 10%, with ETFs making up for around 60% of that addition.

To gain a competitive edge in the market, Jio Financial Services has partnered with Blackrock making this a 50:50 venture, where Jio’s distribution prowess can be well-complemented by Blackrock’s passive investing expertise.

3. Some Other Stuff Too!

While these two sectors will seemingly make up a majority of Jio Financial Services’ business, it is also creating a payments bank to facilitate UPI transactions on its app, while also providing services like broking and insurance, which will tie in with similar usage of the Reliance Group network to cross-sell these services!

All in all - exciting stuff is lined up for the company to make that “Jio” moment happen once again in a space that needs the charisma, flamboyance and sheer will to execute as the Reliance Group exudes - but is it a good stock?

Value Addition or “Invest And Forget”?

While the market does see the potential in Jio Financial Services, valuing it as the second-largest non-banking entity with its Rs. 1.4 lakh crore market cap, it still stands at a modest 1.2x P/BV multiple for FY24E.

Yet, to accurately value the company, we must subtract the value of the shares that Jio Financial Services holds in its parent entity RIL (about 435 million shares), which is about Rs. 1 lakh crore!

This gives us a residual market cap of around Rs. 44,000 crore and a residual book value of a little above Rs. 14,000 crore, giving us an adjusted P/BV of 3x. This is a fair the discount to the largest non-banking entity, Bajaj Finance, with a 6x multiple!

Then again, there is still a business to kick in. Hence, at current levels, the stock doesn’t seem to have downside as such + if and when the business kicks in, it can be valued at the 3x multiple mentioned above. To sum up - the country is its oyster, and there is no limit to what its parent will go to so as to ensure success.

Reliance does have the Midas touch with businesses, whether it is becoming the largest telecom service provider in the country or even something as weird as becoming the largest mango exporter in the country (simply because they wished to turn the barren land near its Jamnagar refinery green and offset the pollution in 1997) - and the same could be seen for Jio Financial Services - but only time will tell!

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