In this week’s wrap-up, we dive into Reliance’s latest attempt to disrupt its financial services division and disrupt the industry.
But before that, here’s one Quick video Zerodha explains how and why they funded us (finshots + ditto). Check it out. It’s a very interesting story and here too there are some lessons for entrepreneurs.
Reliance Industries (RIL) has a “Buy 1 Get 1” offer. Everyone wants a piece of this deal!
Well, it’s not that dramatic.
But let’s explain what is happening – Reliance has finally decided to spin off its financial services business. It will be listed as a separate entity on the stock exchanges within a few months. Its name is Jio Financial Services (JFS). So if you hold 1 share of RIL in your account on 20th July, you are entitled to 1 share of new JFS. This is a 1:1 split ratio.
Investors are excited because it’s a new business to bet on. Now, financial services contribute a small amount 1,500 crores in revenue. This is a drop in the Reliance bucket. So investors get a chance to jump on the ground floor of the elevator in the Reliance empire.
So, why is Reliance doing this now, you ask?
Well, we can’t say for sure, but some theories are floating around.
One of the strangest things is that Reliance Industries share price has been very low for the past two years. There have been no major triggers that have pushed prices north. So this is a way to increase some demand. After all, people will rush to buy the stock to get their hands on JFS shares too, right?
But that is a myopic view. Indeed, the stock price rose more than 5 percent after the announcement. But Reliance had dropped hints of such a listing a few years back. It has been playing the stock market game for decades. So you must believe that there is no need to resort to cheap tricks.
Another more plausible theory is that Mukesh Ambani does not want to deal with issues of leverage. Most finserv companies require you to borrow money first before they can make a loan. This adds to the debt burden. By grouping the FinServ company with other diversified businesses, investors can look at the level of debt at the overall company level and be scrutinized. If that happens it can drag on a lot.
By listing JFS separately, it sort of negates this problem.
Also, Reliance can attract a new set of investors to this business. Big institutional players may want to ride India’s fintech wave, but may not want a piece of oil and gas or retail. They don’t have to worry about ESG factors either. It will be similar to how Reliance got Meta and Google to invest in Jio platforms.
But will JFS succeed?
Well, we don’t know that yet. It’s hard to bet against the man who disrupted the telecom industry in one fell swoop. So let’s lay two things out for you.
First of all, Reliance does not interfere with its team. It first employed the legend KV Kamath ICICI Bank fame as its Chairman. He, in turn, did Adding And experienced benefits from banking industry. So you can’t really say that Reliance won’t have the chops to run the show.
Secondly, if you assume that distribution is king when it comes to financial services, nobody is doing better than Reliance at present. JFS will have immediate access to Jio Telecom’s 400 million users, thousands of Reliance retail stores with an annual footfall of around 800 million, and 2 million merchants running on the Jiomart grocery platform.
So there is an opportunity to take it. Especially when you consider that estimates suggest that 50% of Reliance’s customers have access to credit. But since Reliance has yet to build a significant financial services presence, most of them rely on the likes of Bajaj Finance. According to a RIL executive told Business Standard: “Currently, Reliance is the originator of the credit business from its customers, but this is fulfilled by other financial services companies… They pay a nominal fee to Reliance, which most of the time passes on to customers at a lower cost. We understand and master the business, but we don’t do it on our own.
With JFS now entering the picture, that will change. Reliance will now earn more than just a fee. It can also take away business from competitors.
Finally, it has all the necessary FinServ building blocks in place.
For example, a company needs to ensure that it can find funds at a low cost. Only then can you lend money at low rates and be competitive. Now Jio is backed by Reliance, so it gets a good credit rating of AAA. It makes its job easier. Especially since only 5 other big NBFCs have that rating.
It’s important to make sure you’re smart about underwriting. That you don’t give too much credit and you make sure that people who borrow money can pay it back on time. Let’s just say that there is no other company in India that has access to the consumer behavior data that Reliance has. It has businesses in almost all segments and can track spending behavior very easily. That should help a financial services company make an assessment, right?
To top it all off, don’t forget that deep pockets are also at play. Reliance is essentially going to transfer a bunch of its own shares to its financial services arm. That means JFS will own about 6% of RIL, and at that valuation, it starts with assets of over Rs 1 lakh crore. As such, it will become the fifth largest financial services company in India in terms of net profit.
Yes, you can see why investors in other financial services companies are already a little nervous.
After the announcement, Bajaj Finance and Paytm shares fell. Of course, it could be a correlation. But it’s hard to call it a coincidence. Everyone seems a bit wary of the Reliance juggernaut.
But despite all this bad breath, we have to point out that there is still a lot of competition in the space. Everyone is trying to lend these days. On the merchant side, we have Paytm Having a bigger business network than Reliance. And it is said that the surface of lending has only been scratched here. There is Bajaj Finance, which is on the minds of most customers. Finally, if you are expecting a telecom-like disruption, it will be more difficult. Because here it may compete with Reliance Banks as well. While JFS will try to acquire a banking licence, the RBI is less keen on big corporate houses running banks. Now they are comfortable dealing only with NBFCs. As Macquarie Research points out, NBFC licenses do not allow them to collect minimum deposits from customers. Hence its cost of funding will be higher than the banking channel. That means they cannot be reduced significantly by offering loans at very low rates.
Then there is the inevitable foray into insurance, broking and asset management. You can bet JFS will have stiff competition in each of these segments.
This leads us to the big question – should you buy RIL to own Jio’s stake?
Honestly, you should only invest in a company if you truly believe in its potential. Not because it offers you a shiny deal. We don’t yet know what the roadmap for JFS is. Or how it plans to build the pieces of the Finserv puzzle. So in a way it’s purely speculative.
But, on the other hand, you can argue, “I will immediately sell RIL shares and hold JFS. Otherwise who knows, there might be a mad rush for non-RIL investors to buy JFS on the day of listing, driving up the price. Like international indices FTSE The stock has already been added to their global indices. So once it starts trading, index funds will try to lap up the stock as well. If you’re going to buy a stock when everything about its future has already been mapped out, you may have to pay a premium.
Yes, we don’t know the right answer. We have laid out some factors for you. Now you have to make a decision – is it worth taking a punt on the Reliance brand in the hope of another disruption? What do you think?