Weaker than expected listing shows Jio Financial has much ground to cover 

The optimism surrounding Jio Financial Services (JFS) failed to translate into a strong listing, with the stock falling 5 per cent to hit its lower circuit. This is a reflection of the market view that while valuations remain strong, the NBFC has a lot of ground to cover operationally, starting almost from scratch.

The NBFC 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 joint venture with BlackRock for its asset management business and plans to start insurance arms.

Also read: Jio Financial Services to optimise digital opportunities: Chairman K.V. Kamath

While this will make Jio Financial one of the few home-grown conglomerates to offer all these services under the same roof, it faces stiff competition from established players 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 physical presence for lending, collection and recovery.

According to the latest financials, Jio Financial had no loans on its balance sheet as of March 2023 as it had written 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 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.

“The consumer durables finance market is largely dominated by Bajaj Finance and is a customer acquisition engine for most players. The overall market is not very large, consumer finance disbursements were estimated at Rs 1.35 lakh crore in FY23; the outstanding book may be much lower, as most loans have a short tenure. Even for Bajaj Finance, this business is >10 per cent of the loan book,” Kotak Institutional Equities said in a note.

Jio Financial posted a profit of Rs 31.25 crore for FY23, much lower than the 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 low funding cost, 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 in the retail business, and a telecom subscriber base of 43 crore customers.

The net worth and optimism around the listing was also 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.

Jio Financial had a balance sheet of Rs 1.1 lakh crore as of March 2023, and a net worth of Rs 110 crore, of which Rs 67,100 crore is from MTM gains, mostly on investments in RIL (through OCI) which cost Rs 15,400 crore. This implies that its core net worth (ex-cost of investment in RIL shares) is at Rs 31,600 crore,” Jefferies said in a note.

“The derived price of Rs 262 per share implies a market cap of $20 billion and valuation of core book at 1.9x PB,” it said.

The stock trajectory will now depend purely 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.

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