Jio Financial Services: How To Value Mukesh Ambanis New Fintech?

Reliance Industries Ltd. received approval from the National Company Law Tribunal, Mumbai, for the demerger of the financial services business to create Jio Financial Services Ltd.—the third consumer-facing subsidiary of the billionaire Mukesh Ambani-controlled group after retail and telecom.

The shareholding of Jio Financial Services will mirror that of RIL, with each shareholder getting one share for every one held in the parent.

The financial services business, incubated by RIL through its subsidiary Reliance Industrial Investment and Holding Ltd., currently holds licences for a payment gateway, payments bank, non-bank lending and broking, among others.

The merger, though approved by the NCLT, will require approval from the banking regulator, Reserve Bank of India, the company had said in its scheme of arrangement filed with the NCLT.

These approvals will be key to a faster listing of the fintech on the stock exchanges. RIL announced July 20 as the record date, or the cut-off for shareholders to be eligible to get the new subsidiary's shares, once all regulatory approvals are in place.

Jio Financial Services will focus on digital services and offer consumer and merchant lending for 2 crore retail customers it has acquired through the direct-to-consumer venture. Its latest offering is Jio Pay, a UPI-based payments interface that it plans to launch through its Jio Bharat phone aimed at winning over 25 crore feature phone customers of Airtel and Vodafone Idea.

The new financial arm will start with an equity share capital of Rs 6,570.3 crore to mirror the shareholding of RIL.

Reliance will capitalise the company as part of the scheme of arrangement to ensure the financial arm will have sufficient regulatory capital for business growth.

This capital could further change on the induction of new investors after the demerger, providing new valuations for the company. A flexible structure for Jio Financial Services will allow the company to partner with strategic or financial investors, RIL had said earlier.

The Jio Financial Services will comprise:

Reliance Industrial Investments and Holdings Ltd. (holds RIL treasury shares).
Reliance Payment Solutions Ltd.
Jio Payments Bank Ltd. (subject to the RBI's nod).
Reliance Retail Finance Ltd.
Jio Information Aggregator Services Ltd.
Reliance Retail Insurance Broking Ltd.

Shareholding

While the scheme envisages Jio Financial Services to mirror RIL shareholding, there will still be certain adjustments due to trusts holding RIL shares.

The new company will not issue and allot its equity shares to the trust which hold the treasury shares of the RIL. The spin-off will be effective April 1, 2023.

The Petroleum Trust's sole beneficiary is Reliance Industrial Investments and Holdings Ltd. This company will become the subsidiary of Jio Financial Services.

In the final shareholding, the RIL promoter group will hold 45.8% and the public, including GDR holders, will own 54.20% stake in Jio Financial Services.

RIL has 36.20 lakh shareholders, with 75.10% of these holding up to 100 shares. 14.34 lakh investors, or about 39.60% of the total shareholders, own only up to 15 shares.

JFS Financials

According to available Reliance Industries' disclosures, proforma profit and loss of Jio Financial Services is not available.

The total assets of Jio Financial services declined from Rs 25,851 crore in FY22 to Rs 18,990 crore in FY23. The reasons for the fall were not disclosed.

The financial services segment had a revenue of Rs 1,464 crore in FY23, while EBIT stood at Rs 1,445 crore.
The company will have an authorised capital of Rs 15,005 crore and paid-up equity of Rs 6,353.1 crore.

The net worth or total assets of the financial services business that will be transferred to the new firm is Rs 18,990 crore, according to FY23 disclosures. This forms just 3.8% of standalone RIL's FY23 net worth of Rs 5,02,596 crore.

RIL has ensured through the scheme of arrangement that the financial services arm will be capitalised for the future through Petroleum Trust's 6.27% equity in Reliance Industries, valued at over Rs 1,09,700 crore at current prices or $13.2 billion.

Valuations

Once the financial services business is spun off, share price of RIL will be adjusted.

Based on the net worth of the Jio Financial Services:

The business is valued at around Rs 30 per share.
In addition, Jio Financial Services will hold 6.27% in RIL, the value increases to Rs 151.5 per share.

Together, that gives JFS a book value of around Rs 181.5 per share.

Assuming a 50% holding discount, the treasury stock will contribute Rs 75.73 per share.

Along with other assets, that will give Jio Financial Services a value of around Rs 106 per share—about Rs 67,000 crore or just over $8 billion.

The street, however, will be able to assign a price-to-book multiple for JFS after the FY23 balance sheet and detailed earnings are released.

The financial services spin-off is unlikely to unlock much value for Reliance Industries as the size of the business is not much, according to brokerages. But it gives RIL shareholders access to the fast-growing digital fintech sector, which will be capitalised sufficiently either through secondary market sale of treasury stock or by selling RIL stake to a strategic or financial investor.

* Updates for record date of demerger.