Jio Financial: Is Street overplaying the stock, already?

It’s the gap between actual values ​​and potential that goes into building a company’s valuations. What happened with Jio Financial Services (JFS) on July 20, when parent company Reliance Industries had passed its date to reflect the spin-off of the financial services business, was one such example.

About 6.1 percent of RIL’s net worth has been transferred to JFS. In terms of price discovery, JFS was valued at ₹261.85 per piece as against ₹133 reached on the basis of her net worth. That’s a 97 percent premium even before it’s included.

What is the reason for this premium? What exactly builds JFS’ balance sheet apart from a meaty net worth is something investors don’t know. So, this premium stems from the hope that JFS can be a market disrupter, just like its telecom counterpart. To some extent, the bet is not without support. The company is full of funds. With RIL’s credentials, access to the credit market at the cheapest rates is almost a given. Above all, it starts with the strength of a well-established distribution network, both business to consumer (B2C) and business to business (B2B).

But is the lead sufficient to justify the insurance premium? JFS is expected to be listed on the stock exchanges by October and we will get our first glimpse of its financials. At present, it is expected that a variety of some of the existing lines of credit granted to group companies, or intercompany loans in simple terms. On 21st October 2022, RIL has decided to spin off its financial services business into Reliance Strategic Investments Ltd which has now been given a new identity – Jio Financial Services.

JFS holding the NBFC license will have six companies. Jio Payments Bank is a household name for the investor. The project has been a pretty wet sham. The purpose of JFS, as explained by RIL, is to acquire liquid assets to provide sufficient regulatory capital for lending to consumers, merchants, etc., and to incubate other financial services sectors such as insurance, payments, digital brokerage, and asset management for at least the next three years of business operations.

In other words, JFS is expected to be the big daddy who rescues troubled companies and brings them under their own fold, which is necessary to reduce the promoter nodes in JFS over time. But can JFS organically make a tag?

Experience in the field of communications

Extending the communications model to include JFS may turn out to be misplaced optimism.

First, it is well established that the regulations are tighter against waterproofing of NBFCs compared to the telecom industry. If JFS were to be classified as an upper tier of NBFC, it would have to operate like a bank without being a bank. In this case, the cost of capital may never be a constraint. But what about compliance and the costs associated with it, something the group has not encountered in its current lines of business. Can JFS line collision?

Secondly, when Jio made a dent in the telecom sector, the space almost shrank down to two or three healthy players. Only Bharti Airtel, the market leader, was financially and operationally secure. But financial services are a different game.

The top 20 players (banks and non-bank financial companies) are well capitalized and have demonstrated business models with an established client base. Pricing and quality of service (mainly response time) are critical factors influencing customer loyalty.

For JFS, battling the big banks over rates can be a challenge, and the big non-bank financial firms have the bandwidth to play on rates to ensure the stability of their clients. Therefore, the idea that JFS can disrupt Bajaj Finance, which has built a solid model over two decades, may not work as easily as the Street would imagine.

Unknown area

A successful financial services business is built on a solid risk management framework, whether it is lending, insurance or asset management. Unlike telecom or retail, risk management is the key to longevity, not strong distribution reach. It is true that JFS attracts rich talents from big banks including ICICI Bank. Its former boss, Kamath, is the leading force. But more often than not, it is the institutional framework and its constraints that define people and practices. Replicating a model in another organization has its limitations, including cultural differences. After all, even for the best baker, the proof of dessert lies in the eating. JFS is still in the “flour” state and investors may be jumping the gun without empirical data to back up the optimism.