Jio Financial Services: All you need to know

The Reliance Industries share is back to the same price levels from where it started its upward journey last month. Its journey north started after the company fixed the record date of July 20 for Jio Financial Services (JFS) shares. The stock jumped nearly 15% between the last week of June and July 19.

Reliance Industries said that every Reliance shareholder holding a Reliance share on July 20 will get a Jio Financial Services (JFS) share in the ratio of 1:1. If you had 100 shares of Reliance on the record date, you will get 100 shares of JFS. The jump in price was a clear indication that a significant number of investors wanted JFS shares upfront - there is still no other way to get JFS as the shares are not trading. 

An important question arises. Why this much hype and demand for Jio Financial Services shares? In today's article, we will discuss everything you need to know about JFS. 

The price and the business

As per available data, about 6.1% of RIL's net worth is to be transferred to JFS, and based on its net worth, the ideal value should have been only Rs 133. Also, most experts had estimated the price of Jio Financial Services to be between 160 and 190. However, on 20th July, the market assigned a price of Rs 261.85 per share, highlighting a significant premium. 

However, it is already trading at an almost double premium. Let us first understand Jio Financial Services as a company.

Jio Financial Services is a financial services company with investments in six companies: Reliance Industrial Investments and Holdings (RIIHL), 

Reliance Payment Solutions, Reliance Retail Finance, Jio Payments Bank, Jio Information Aggregator Services, and Reliance Retail Insurance Broking Ltd. In an earlier statement made by the company, JFS's purpose is to acquire liquid assets to provide adequate regulatory capital for lending to merchants, consumers, etc., and incubate other financial services verticals such as asset management, insurance, digital broking, and payments for at least the next three years of business operations. 

As per BoFA, consumer durable lending could be one of the initial focus areas of Jio Financial, as they already have a user base taking credit for buying electronic items at Reliance Retail stores.

An interesting number for readers: Jio Financial reported a net profit after tax of Rs 145 crore for Q1FY23 based on revenue of Rs 215 crore. Let us also look at their previous annual numbers. For FY21 and FY22, the company only reported revenue of Rs 2.95 crore and Rs 1.84 crore, respectively (a downfall). In the same period, the profits were Rs 1.23 crore and Rs 1.68 crore, respectively. The numbers have grown significantly since then, but there are still small numbers compared with peers. In fact, they are too small to even have a meaningful comparison. 

To view Reliance Industries latest quarterly result analysis, click here

Reasons for demerger

In the last few years, news of Reliance Retail and Jio's demerger has been around. However, Jio Financial's demerger came as a surprise to most last year. The company has many reasons to demerger its financial services business, including:

• First, the growth and expansion of a financial services business require a different strategy and a different set of investors. Some investors may only want to invest in growing businesses rather than put their money in Reliance.
• It was also a need - a kind of mandatory need. Jio Financials will be competing with NBFCs, so technically, they would be in the business of lending. Unlike banks, they cannot open savings and current accounts to get the cash to lend. They have to borrow it and then lend it. If financial services had remained under Reliance and borrowed money, it would have shown as debt on Reliance's balance sheet, something the company and its shareholders would not have liked. Until now, the business was small, so there were no issues. Now, the financial services business is on an expansion route and would hence need more money to scale.
• It makes a lot of sense to run the asset management, insurance selling, and lending arms as a separate entity. The regulations and the regulatory agencies work completely differently here, and it would be easier for the company to secure licenses and approvals as a separate entity.

The Hype - Justified?

Finally, we come to the most crucial part of the article - is all the hype justified? 

Point 1

The main reason investors are giving a premium evaluation to a business that recently started is the history of Reliance. Everyone knows how Reliance disrupted the Telecom sector in India. Investors have expected a similar disruption in the financial sector from Reliance. One cannot deny the possibility of it, but investors need to understand a vital point here - the regulation in the NBFC space is super tight. JFS has been tagged as an upper-layer NBFC. It is tough for the company to function akin to a bank without being a bank. It has to take care of compliance, something the group has not encountered in its existing lines of business. 

Point 2 

Great companies are built by great leaders. JFS is doing everything to have excellent leadership. For example, the bank has roped in KV Kamath to take charge of the business. He is a former Chairman of ICICI Bank. Only time will tell if he can replicate the same story here, but the journey will not be easy. It is a different business - an NBFC and not a bank.

Point 3

Another reason there has been a demand and hype around JFS is that most investors believe that nearly 25 crore retail customers and 44 crore telecom subscribers can enable a strong ramp-up of the business in a short time.

To sum up

JFS is at a very nascent stage, and it would be tough to estimate whether it will scale up to the levels investors expect it to and if valuations are justified. 

We need to see what happens post-listing and a clear plan from the management on how they see the business. As of now, the listing date is not available, but it would be in a few weeks. Investors can expect more details in the AGM in August.