As part of the demerger, JFSL has received 413 million treasury shares or 6.1% of the total share capital of RIL. At the current market price, the value of these shares is about Rs 1 lakh crore.
JFSL can either sell these shares in a staggered manner or simply hold on to them. Till the time RIL shares are part of JFSL’s piggy bank, any potential upside or downside in RIL stock can have a ripple effect on the NBFC stock as well.
Given the fact that the business of Jio Financial is still in its nascent stages, a large part of its valuation is derived as a holding company.
“An equity stake in unrelated group companies is typically valued at some level of holding company discount for most large, listed stocks possibly because investors do not like unrelated businesses and/or if this stock is separately listed then investors can directly take ownership rather than through a holding structure,” said CLSA analyst Vikash Kumar Jain.
Other than stake in RIL, liquid assets worth $2.5b billion have been demerged into JFSL. Looking at peer NBFCs, this can support a loan book of $13-15 billion. Even at the speed of the recent annual loan book additions of sector leader Bajaj Finance, JFS will take nearly three years to fully use up this amount. This takes away the need to liquidate its stake in RIL in the near term,” Jain said.
However, given the scale of resources being committed and a credible leadership team, the market will also ascribe value to its future potential. “Ascribing 5x multiple to Rs 193 billion of consolidated net worth (excluding cost basis for 6.1% RIL stake) and market value for 6.1% RIL stake after 20% holding company discount, indicates equity value of Rs 285/share (market cap of $22 billion). Our scenario analysis indicates JFS valuation of Rs 200-320/share ($15-25 billion),” Viral Shah of IIFL Securities said.
Excluding the treasury shares, the market is valuing JFSL’s core business at less than 6x trailing book value, InCred Equities said. On the other hand, most lending financials trade below 3x PB, except Bajaj and Chola, which have return ratios of over 20%.
“We expect such euphoric valuations to hold for a while amid expectation of robust organic growth as well as probable opportunities of inorganic growth available in the financial domain,” InCred said.
Ambani’s gameplan
JFS will be entering four businesses – retail lending, AMC insurance (life, non-life and broking) and digital payments. “We estimate JFSL’s lendable net worth to be $2.7 billion (19% of consolidated reported), and expect it to initially target consumer durable, unsecured PL and small ticket merchant loans. We expect gradual scale-up (save for any acquisitions), as it builds out physical and collections infra,” IIFL said.
As a digital led-financial services platform, the company has plans to launch consumer and merchant lending business based on proprietary data analytics to complement and supplement the traditional credit bureau-based underwriting.
Consumer lending will include financing for consumer durables sold through retail stores to begin with and will add more secured loans later. Merchant lending vertical will focus on merchants in grocery, digital, fashion and pharma formats. In the SME segment it will focus on working capital loans. It will build payments platforms focussed around merchants, ramp-up Jio Payments Bank and build insurance broking. It has already set up a joint venture with Blackrock to launch an AMC business.
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