It is the gap between actuals and the potential which goes into building the valuations of any company. What happened with Jio Financial Services (JFS) on July 20, when its parent company Reliance Industries went ex-date to reflect the demerger of the financial services business was one such instance.
About 6.1 per cent of RIL’s net worth was transferred to JFS. In terms of price discovery, JFS was valued at ₹261.85 apiece as against ₹133 arrived at based on its net worth. That’s a premium of 97 per cent even ahead of its listing.
What is this premium being ascribed for? What exactly is the construct of JFS’s balance sheet apart from a meaty net worth is something investors aren’t aware of. Therefore, this premium is stemming from the hope that JFS will be a market disruptor, just like its telecom counterpart. To an extent, the bet isn’t without a backing. The company is flush with funds. With RIL’s credentials, access to credit market at cheapest rates is almost a given. Above all, it kickstarts with the power of a well-established distribution network, whether on business to consumer (B2C) or business to business (B2B).
But is the head-start enough to justify the premium? JFS is expected to list in the bourses by October and we will have the first glimpse of its financials. Presently, it is expected to be a motley collection of some existing lines of credit extended to its group companies, or inter-corporate loans in simple terms. On October 21, 2022, RIL decided to demerge its financial services business to Reliance Strategic Investments Ltd which has now been given a new identity — Jio Financial Services.
JFS which holds the NBFC licence will have six businesses, of which Jio Payments Bank is a familiar name to investor. The venture has been quite a damp squib. The purpose of JFS, as articulated by RIL, is to acquire liquid assets to provide adequate regulatory capital for lending to consumers, merchants, etc., and incubate other financial services verticals such as insurance, payments, digital broking, asset management for at least the next three years of business operations.
In other words, JFS is expected to be the big daddy bailing out ailing businesses and brining them under its fold, something essential to reduce promoter holding in JFS over time. But can JFS make a mark organically?
Extending the telecom example to JFS could turn out to be misplaced optimism.
Firstly, it’s well-established that regulations are watertight for NBFCs compared with the telecom industry. If JFS gets categorised as an upper layer NBFC, it would have to function akin to a bank without being a bank. In which case, cost of capital may never be a constraint. But what about compliance and its allied costs, something that the group hasn’t encountered in its existing lines of businesses. Can JFS toe the line?
Secondly, when Jio made a dent in the telecom sector, the space was almost reduced to two or three serious healthy players. The market leader, Bharti Airtel, was the only one at a safe spot, financially and operationally. But financial services is a different play.
The top 20 players (banks and NBFCs) are well-capitalised and have demonstrated business models with established customer base. Pricing and the quality of service (mainly the turnaround time) are critical factors to sway customer loyalty.
For JFS, fighting the large banks on pricing could be a challenge and the large NBFCs have the bandwidth to play on pricing to ensure stickiness of their customers. Therefore, the notion that JFS could disrupt Bajaj Finance, which has built a solid model over two decades, may not play out as easily envisaged by the Street.
Successful financial services business are built on strong risk management framework, whether lending, insurance, or asset management. Unlike telecom or retail, risk management is the key for longevity, not the robust distribution reach. True that JFS is attracting rich talent from large banks including ICICI Bank. Its former chief, KV Kamath, is the spearheading force. But often, it is the institutional framework and its restrictions that define its people and practice. Replicating a model in another institution has its limitations including cultural differences. After all, even for the best baker, the proof of the pudding is in the eating. JFS is still in the ‘flour’ state and investors may be jumping the gun without having empirical data to back the optimism.