Building on upbeat valuation, Jio Financial has ground to cover on fundamentals

The newly constituted Jio Financial Services starts its journey on an optimistic note with market players upbeat about the listing of its shares effective August 21. However, the NBFC has a lot of ground to cover operationally, starting almost from scratch.

It is expected to commence lending activities immediately, and then look at other non-lending business ventures such as broking and payments. It has entered into a JV with BlackRock for its asset management business and plans to start insurance arms.

While this will make Jio Financial one of the few conglomerates in the country that offers all these services under the same roof, it faces stiff competition from established players in each segment across the lending and non-lending segments.

Lending from scratch

In its focus segment of unsecured loans, competition has been intensifying led by new age, asset-light and digital-focussed fintechs and NBFCs. It will also be at a disadvantage in secured lending, which remains the forte of banks due to their lower cost of funds and a broader scope for lending, as it is requires more time, effort and a larger physical presence for lending, collection and recoveries.

According to the latest financials, Jio Financial had no loans on its balance sheet as of March 2023 as a result of writing down the legacy book ahead of the de-merger. It has had bank balances of Rs 5,000 crore and an investment book of Rs 19,401 crore. On the liabilities side, total borrowings stood at Rs 743 crore.

On a consolidated basis, too, loans were at Rs 41 crore, whereas investments were at Rs 1.1 lakh crore. In addition to NBFC Reliance Strategic Investments, Jio Financial also includes the business of Jio Payments Bank, Reliance Retail Finance and Reliance Retail Insurance Broking.

Jio Financial posted a profit of Rs 31.25 crore for FY23, much lower than Rs 168.04 crore in the previous year, led by a sharp fall in operating profit to Rs 39.28 crore. It saw interest income of Rs 38.34 crore in FY23, and other income of Rs 3.21 crore.

Lending opportunity

Aided by advantages such as low funding cost, a high credit rating, large balance sheet, strong promoter backing and presence of industry stalwarts on the board, the focus will be on unsecured consumer and merchant lending, given the Reliance Group’s large customer and merchant network in retail, especially electronics, and telecom.

To leverage its ecosystem, a lot of work will be required in terms of building teams and platforms for technology, analytics, payments, recoveries, compliance and integrating the entire ecosystem for cross-sell opportunities. Reliance Industries has a network of 18,040 retail stores, 25 crore registered customers under the retail business, and a telecom subscriber base of 43 crore customers.

The floor price for listing has been set at Rs 261.85 as per a price discovery session on July 20, valuing the company at Rs 1.66 lakh crore, making it the third largest NBFC in the country, after Bajaj Finance and Bajaj Finserv. The net worth and optimism around the listing has also been driven by the transfer of treasury shares from RIL, which will provide adequate regulatory capital for the lending business and help incubate other verticals over the next three years.

Sustaining this optimism will now purely be dependent on the NBFC’s ability to scale its businesses. There is also the risk of ‘too much too fast’, an analyst said, adding that to ensure profitability, there is a need for a more focussed capital allocation strategy to de-risk the growth trajectory.