RIL AGM to set roadmap for Jio Financial Services, says JPMorgan

Foreign brokerage JPMorgan said Reliance Industries' forthcoming annual general meeting (AGM) may set the roadmap for Jio Financial Services (HFS). The brokerage said while it does do not see listings of the consumer business this year or any stake sale in the new energy business, progress on JFS would be a near-term catalyst for the stock.

JPMorgan said it values JFS primarily at 1 time the treasury stock it would own post demerger. JPMorgan said Reliance's 17,000-plus retail stores and 40 crore mobile subscribers give it a head start in digital fintech.

JFS plans to launch consumer and merchant lending business based on proprietary data analytics to complement and supplement the traditional credit bureau-based underwriting. It is seen continuing to evaluate organic growth, joint-venture partnerships as well as inorganic opportunities in insurance, asset management and digital broking segments’.

"We expect more details on JFS, RIL’s plans for the same, and the roadmap ahead in this year’s AGM," JPMorgan said.

JPMorgan said its conversations with investor indicates that investors are unwilling to ascribe a material value to JFS at this point, given that most of the businesses still need to be built out. The official demerger should take up to a year, JPMorgan said. Over the next 12 months, it expects RIL to build out the overall JFS business via both organic and acquisition steps.

"We currently value JFS at the RIL treasury stock value (1x), and the next 12 months depending on how RIL builds out and scales up JFS (organic/ acquisition) should determine how markets value JFS. Every 1x turn higher on the RIL treasury stock adds Rs 190 to our fair value," it said.

To recall, RIL had announced the demerger of Jio Financial Services (JFS) into a separate entity with existing shareholder of RIL getting 1 share in JFS for every share they own in RIL.

Post the demerger JFS would be listed in the exchanges. The current 6.1 per cent holding in RIL owned by RIHL would be transferred to JFS. JPMorgan said that would effectively be the starting point of valuation for JFS.

Through the scheme of demerger, JFS would acquire liquid assets to provide adequate regulatory capital for lending to consumers and merchants, and incubate other financial service verticals for the next three years.

"We view the JFS demerger as a major positive as it would allow RIL shareholders a direct play on India’s fast growing Digital Fintech market, via an entity which would be able to leverage RIL’s vast footprint across telecom and retail," JPMorgan said.

For example in the retail business, RIL currently has 16,617 stores across formats and categories in its retail business. RIL’s retail business is the industry leader across retail categories, it said adding that "This large footprint gives JFS a material advantage." RIL’s telecom footprint (Jio) and retail footprint should allow for faster rollout of JFS, the brokerage concluded.

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