Rating: buy; Financial foray to create opportunities for Reliance – The Financial Express

The Financial Express
RIL’s foray into financial services with Jio-FS will open opportunity to RIL’s entry into the financial services industry with Jio-FS will create opportunities for the company to compete in India’s consumer and commercial loan markets, as well as the non-banking financial sector. However, it may take up to six months for the demerger and listing process to be completed, and building the necessary technology, analytics, and recovery platforms may require additional time.
RIL’s chairman and CEO are former leaders of ICICI Bank, and with an aggressive push, the company could impact existing players in the consumer loan and payments markets. We believe that RIL’s financial services business could be valued at Rs 900-1,500bn/134-224 per share, and as a result, we are raising our sum-of-the-parts valuation for RIL to Rs 3,100.
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Jio-FS listing likely by Sep-23: All necessary approvals for listing of shares of Jio-FS should be in place by September. It will commence lending activities immediately and proceed for regulatory approvals for asset management, life and general insurance. Regulatory approvals are expected to take 12-18months.
Jio-FS may focus on consumer & merchant lending & non-lending businesses: In the backdrop of group’s large presence in retail & telecom segments that drive customer base of 20 million as well as vendor partnerships, JFS’ first port of call could be consumer lending (esp. electronics) & merchant financing. Jio-FS’s key advantage will be low funding cost/better access on the back of group’s high credit rating & owner & benefit from recent regulatory change that allows banks to have up to 9 insurance partners. Payments business may be built to acquire customers, as standalone economics are quite weak.
Jio-FS has made select appointments: Kamath (earlier CEO of ICICI Bank) will be chairman & Hitesh Sethia will be CEO. We watch-out for build-up of team & platforms for tech, analytics, payments, recoveries, compliance that take time to stabilise & are difficult to build inorganically. Aggressive stance could impact players in payments (like Paytm, Phonepe) & NBFC lenders like Bajaj Finance.
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Nuances of capital, capitalisation. Jio-FS has networth of Rs 280bn & including MTM gains on 6.1% stake in RIL, it may rise to Rs 1.1tn. Still from regulatory perspective, core networth may be Rs 140bn once the cost of investment in RIL is deducted. Therefore, Jio-FS may over next few years look to raise capital to fund growth or support cash-backed M&A as need to write-off goodwill will bring down capital.
Based on core networth of Jio-FS (Rs 140 bn) and value of stake in RIL (Rs 1tbn) with PB range of 3-5x as well as holdco-discount of up to 40%, we value Jio-FS in the range of Rs 900-1,500bn that implies Rs 134-224/share in RIL’s SoTP. Our PT rises to Rs 3,100 implying 33% upside.
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