Jio Financial Services: A $19-Billion Fintech With Very Little Business To Show

Reliance Industries Ltd. spun off the financial services segment into a separate company, which got valued at over $19 billion.

While the information memorandum of the company filed with the stock exchanges mentions Jio Financial Services Ltd.'s subsidiaries, it discloses nothing on the business it does. Still, every brokerage has ascribed the company a market value of $19-22 billion—just based on its future potential.

The listing came exactly a week before Reliance Industries' AGM. And it was probably aimed at preventing Jio Financial Services from being removed from the major global indices of FTSE Russell and MSCI as inclusion helps draw institutional investments.

It shouldn’t have taken over 22 days to list the company, given that shares were credited much earlier. More so when, given the current technology, shares of HDFC Bank Ltd. were credited in the demat accounts of HDFC Ltd.'s investors and began trading within a few days.

Now that Jio Financial Services has been listed, the street is in a guessing game.

To be sure, the company's subsidiaries suggest that it plans to enter:

• Retail lending.

• Asset management with BlackRock.

• Insurance (life, non-life and broking).

• Digital payments.

There is no doubt the company has created a board and management team led by one of the best financial minds in former ICICI Bank Ltd. Chairman KV Kamath. But, who will tell the street what they plan to do? For RIL shareholders, who received JFS shares, this could help unlock value but even they need to know how the business will scale up.

Jio Financial Services is expected to start with consumer durable and merchant lending (including personal, secured and unsecured loans); and working capital and small-ticket business loans to small and medium enterprises.

It's not an easy business to scale as SMEs require services like bank guarantees and overdrafts to letter of credits and bill discounting services, along with other banking services.

IIFL Securities, in its note, said it expects a gradual scale-up, save for any acquisitions, as it builds out physical and collection infrastructure. To put that into perspective, JFS has 29 employees as compared with peers having 800-4,000 branches and 4,000-66,000 employees.

Also, JFS reported consolidated net worth of Rs 1.15 lakh crore but a large portion of this is attributed to 6.1% stake in RIL and other associated companies. That leaves just around Rs 21,000 crore as core net worth that can be lent out. The value of RIL shares can't be used to advance loans unless liquidated. 

In the proposed asset management business, both JFS and BlackRock have committed to invest $150 million each and they could offer low-cost passive funds to begin with.

The mutual fund business, however, is tough and distribution is not easygoing as seen by the experience of many existing players.

JFS will have a payment bank with SBI and an account aggregator business. But the independent business case for a payments bank is lacking and all entities with such a licence, including India Post with its vast reach, have not been able to scale it up.

The business model for account aggregators is yet to evolve as there is no data advantage, given regulatory restriction on customer information.

Insurance is a grounds-up business and will take at least 10 years to scale up, unless Jio Financial Services acquires an existing life or non-life insurance company. Insurance brokerage business is very competitive with bancassurance channel having the advantage.

Given these challenges, is the market putting the cart before the horse when valuing JFS at $19-22 billion?

To those who want to hold this Ambani share, there isn't any information or business update, something which should have been disclosed before the listing. What is more surprising is even the key management personnel who attended the listing did not attempt to articulate any of this at the listing ceremony.

When loyalty is dwindling and customer retention is tough, an Ambani stock may have equity in the market. But blind faith is something that does not happen in this fintech era.

Sajeet Manghat is Executive Editor at BQ Prime.