Is Jio Financials the next big disruptor? Stock Analysis

JFSL or Jio Financial Services Limited is a Core Investment Company—Non-Deposit-Taking—Systemically Important Company (CIC), registered with the Reserve Bank of India, and operates the financial service businesses through its consumer-facing subsidiaries.  

Business Overview:  

Jio Financial Services Limited operates through the following subsidiaries & verticals: 

• Jio Finance Limited   

• Jio Insurance Broking Limited   

• Jio Payments Solutions Limited  

• Jio Leasing Services Limited  

• Joint Venture with SBI, Jio Payments Bank Limited  

• Joint Venture announced with BlackRock.  

• JLSL has set up a 50:50 JV with Reliance International Leasing IFSC Limited (RILIL) and Reliance Strategic Business Ventures Limited (RSBVL) for undertaking ship leasing business.  

We will delve into each business vertical in order to get a clear idea of the business:   

• Jio Finance Limited (JFL): Formerly known as Reliance Retail Finance Limited, Jio Finance Limited (JFL) is a wholly owned subsidiary of JFSL and has registered with the RBI as a systemically important non-deposit taking NBFC. With a digital first approach, JFL is primarily engaged in consumer lending, corporate and MSME lending.  

• Jio Payments Bank Limited: Jio Payments Bank Limited, a joint venture between the company and the State Bank of India with a shareholding of 77.25% (22.75% holds a payments bank license issued by RBI to provide digital banking solutions to consumers and small businesses.  

The services include savings account, debit card, current account, wallet, and a host of consumer payment solutions such as UPI, Aadhaar Enabled Payment System (AePS), remittances etc.  

• Jio Payments Solutions Limited (JPSL): Formerly Reliance Payment Solutions Limited, JPSL has an in-principal approval from the RBI to operate as a Payment Aggregator (PA) to capitalize on the emerging opportunities in the fast-expanding payments industry.  

• Jio Insurance Broking Limited (JIBL): Formerly Reliance Retail Insurance Broking Limited, JIBL obtained its direct broker license from the Insurance Regulatory Development Authority of India (IRDAI) in 2007.  

• Jio Blackrock – Joint Venture: On July 26, 2023, JFSL took a significant stride into the asset management sector by forming a joint venture with BlackRock Inc. Group, the world’s largest asset manager. The strategic partnership, a 50:50 JV, is aimed to leverage JFSL’s extensive market reach and BlackRock’s investment acumen to democratize consumer access to top-tier investment solutions across India.  

• Jio Leasing Services Limited (JLSL): Jio Information Aggregator Services Limited (JIASL), later renamed as Jio Leasing Services Limited (JLSL), offers operating lease solutions to consumers and businesses through a Device-as-a-Service (DaaS) model.  

Going ahead, before we discuss the fundamentals of the company, we will dive into the industry overview. 

Industry Overview:  

According to an SBI report, India’s non-banking financial sector has grown to become the third largest in the world, next only to the United States and the United Kingdom, and that highlights the growing strength of the country’s financial sector.  

Non-banking financial institutions do not possess a full banking license and thus cannot accept public deposits. These entities focus on giving loans to consumers and businesses, which play a key role in driving up economic growth.  

According to a report released by PWC, NBFCs have emerged as a crucial source of finance for a large segment of the population, including micro, small, and with banks, and extend greater credit offerings to MSMEs and economically unserved segments.  

Strengths:  

• Debt-free: Jio Financials has managed to become a debt-free company. In FY 2023, the company had a debt of around INR 743 crore and as of March 2024, there were no borrowings, which is a positive for the company.  

• Strong capitalization profile: JFL has a strong capital base, with a standalone net worth of Rs. 3,830 crores and no borrowings as of March 31, 2024. On a consolidated basis, JFSL’s net worth stood at Rs. 1,39,148 crores, including a 6.1% stake in Reliance Industries Limited valued at around Rs. 1,22,700 crores. JFSL’s standalone net worth was Rs. 24,437 crores on the same date.  The strong financial position, supported by a solid promoter profile and ample liquidity, is expected to help JFL secure funding at competitive rates and diversify its lender base, which should enhance profitability.  

• Brand recognition: The Jio brand, backed by Reliance Industries, comes with a high level of trust and credibility. The Jio brand is already well-established and trusted in the market, particularly in the digital and telecommunications sectors. This strong brand recognition can attract customers to JFSL’s financial products and services, giving it a competitive edge.  

• System Integration: Jio Financial Services benefits from its affiliation with the broader Reliance ecosystem, which includes telecommunications, retail, and digital services. This integrated approach allows for cross-selling opportunities, leveraging existing customer bases from other segments.  

 
Jio Leasing Services Limited 

Leasing Operations: Jio Leasing Services Limited (JLSL) offers operating lease solutions to consumers and businesses through a Device-as-a-Service (DaaS) model.  

But what is the Device-as-a-Service model? 

Device as a Service (DaaS) is a subscription-based model where a company leases hardware from a provider in exchange for a monthly payment.  

What do they give for lease?  

According to the annual report released by Jio Financial Services Limited, they offer a range of products, including: AirFiber, devices, IT equipment, solar panels, EV batteries, and ship leases.  

So, this is where we need to talk about a landmark transaction: On June 21, 2024, shareholders of Reliance Industries approved a deal worth $4.3 billion between its units, Reliance Retail and Jio Financial Services.  

JFS planned to acquire equipment worth $4.3 billion from Reliance Retail, the financial services provider who plans to enter the device leasing business. Through this deal, they will acquire premises equipment, devices, and telecom equipment such as routers and cell phones.  

But who will lease these from JFLS?  

In order to connect the dots, we went through various reports, and in the postal ballot notice released by Reliance Industries, we found this interesting point:  

JLSL will purchase customer premises equipment, devices, and telecom equipment from RRL, which will be provided by JLSL on an operating lease to the customers of Reliance Jio Infocomm Limited. The above transactions will be at cost plus margin. It is like a win-win for both of these subsidiaries.  

Just imagine this again: Jio Financial Leasing services buying telecom equipment, which is needed by Reliance Jio InfoComm Limited, from its group company Reliance Retail.  Interesting right? How do you see this: as a strength, risk, or just as a business gimmick? 

Risks:  

• High PE: The PE of Jio Financial Services Ltd. is 139.15, while the industry PE is around 24. Revenue & associated profit growth might help lower the PE significantly over time.  

• Business verticals are in the nascent stages. The majority of the business verticals are in the starting stages, and even some are in the phase of attaining the approvals of licenses. This looks uncertain, as they need a lot of permissions in order to execute their operations.  

• According to the CARE Ratings, Jio Financial Leasing Services has a plan to scale up operations over fiscal 2025 and 2026.  Additionally, JLSL has commenced ship leasing business and is also planning to venture into aircraft leasing business through International Leasing IFSC Ltd, a JV with another group entity. While the company has established policies and procedures, they remained untested due to its nascent stage.  

• Credit Risk: Credit risk arises when borrowers fail to meet their financial obligations; the JFSL may suffer severe losses.  

• Regulatory risk: As a financial services company, it must adhere to strict financial regulations and norms set by authorities like the Reserve Bank of India (RBI). Any non-compliance could lead to penalties or operational restrictions. Changes in regulations regarding digital payments, data privacy, and consumer protection could pose challenges to their business model.  
   

• High Competition: There is tough competition in this particular sector. For Jio Financials to attain a major market share, they need to struggle a lot in the process. Though the company is backed by a strong capital base, there are some well-settled players who have their roots deeper in this particular industry.  

Competitors:  

Financials:  

The quarterly financials of the company are presented here. The company’s financial performance between June 2023 and June 2024 shows some ups and downs. Sales grew strongly in September 2023, reaching 608, but dropped back to 414 by December and only saw small improvements after that, staying mostly flat at 418 in March and June 2024. Expenses rose steadily, peaking in March 2024 before dropping again in June. Even though the company kept its operating profit margins high, they dropped from 91% in June 2023 to 77% in December and March, before slightly improving to 82% in June 2024. Net profit also had a big spike in September but softened after. Overall, while the company remains profitable, the flat sales in recent quarters suggest it might face challenges in keeping up growth.  

And apart from these, there are a are a few things that we need to discuss about the company’s financials:  

1. PBV: We already looked at the PE, but there is another valuation parameter that is PBV. PBV is very crucial for the financial and banking institutions. The PBV of the company is INR 219. The current share price as of September 5th is 348. Which is more than the book value.  

2. Net Interest Income (NII) for Q1 FY25 stood at INR 1,617 Mn, a decline of 15.6% YoY/42.4% QoQ on account of lower interest income.  

3. Reduction in Debtor Days: In the financial year 2023, the debtor days are at 113, but it almost came down to a single digit of 3 debtor days in the financial year 2024.  

This indicates the effective recovery of its loans and payments. This is a good sign, but the company should maintain the same in the coming days as well. 

Shareholding pattern:  

The shareholding pattern from September 2023 to June 2024 shows some shifts. Promoters slightly increased their stake to 47.12%, while FIIs and DIIs reduced theirs, with FIIs dropping from 21.58% to 17.55% and DIIs from 13.64% to 11.79%. Public ownership steadily grew from 17.86% to 23.39%, and the number of shareholders increased significantly, suggesting rising public interest. Overall, institutional investors are pulling back while individual investors are becoming more involved, reflecting changing market dynamics.  

Growth triggers:  

1. JV with Blackrock: In July 2023, Black Rock and Jio Financials Services Ltd announced an agreement to form JIO Black Rock with a 50:50 JV. Blackrock’s deep expertise and talent in investment management, risk management, and intellectual capital around markets, while JFS contributes local market knowledge, digital infrastructure capabilities, and robust execution capabilities. JFS and BlackRock targeted an initial investment of US $150 million each in the joint venture.  

There is a huge scope for the asset management industry. In the past 5 years, the industry’s AUM has more than doubled, rising from INR 23.8 trillion in 2019 to INR 53.40 trillion in 2024.  

As per the statistics, the Indian Asset Management Market is growing at a CAGR of 14%. According to the AMFI data, Average Assets Under Management (AAUM) of the Indian Mutual Fund Industry for the month of July 2024 stood at ₹ 64,70,664 crore.  Assets Under Management (AUM) of the Indian Mutual Fund Industry as of July 31, 2024 stood at ₹ 64,96,653 crore.  It clearly indicates the potential of Jio Financials along with BlackRock to tap and grab the major market share. This will contribute higher revenues and profits to the company if everything goes as planned.  

2. Frictionless Credit by RBI: The Reserve Bank of India (RBI) is working on a platform called the Public Tech Platform for Frictionless Credit (PTPFC), currently in its pilot phase, to enable seamless access to credit. This platform will streamline the flow of digital information to financial institutions, focusing on areas such as Kisan Credit Cards, dairy financing, unsecured MSME loans, personal loans, and home loans through participating banks.  

3. India Stack and Digital Public Infrastructure: To promote the use of digital financial services, the Indian government is developing API-based infrastructure to simplify consent-based financial data sharing. This initiative aims to help unbanked individuals and small businesses gain access to credit. Digital public infrastructure components like Account Aggregators (AA), Open Credit Enablement Network (OCEN), and Open Network for Digital Commerce (ONDC) are expected to become more mainstream in the near future. ONDC, in particular, is extending its architecture to support four key areas: credit, insurance, investments, and gift cards.  

ESG:  

Environmental:  

1. Since climate change is a significant material focus, JFSL, despite commencing its operations in the middle of the year, has been deliberate about its efforts towards climate change and has diligently measured and publicly disclosed its GHG emissions, energy consumption, water usage, and waste management practices.  

2. During FY24, the company and its subsidiaries allocated ₹ 9.33 crore towards approved CSR initiatives.  

Social:  

1. JFSL Launches First ESG Outreach Initiative: They have made a significant stride in promoting financial empowerment through their ESG outreach program. They had organized a financial literacy camp in the underprivileged slums of Mankhurd, Mumbai, aimed at raising awareness and providing access to essential financial services. This was organized in the local language to maximize the impact.  

2. Other financial awareness activities: JFSL had organized financial awareness initiatives across rural villages and areas in UP and also in Navi Mumbai.  

3. Gender diversity: AT JFSL there are 584 employees out of which 158 employees are women. It indicates 27% of women employees.  

Governance:  

According to several media reports, The Securities Appellate Tribunal (SAT) has canceled a penalty of Rs 7 lakh imposed on Jio Financia Services by SEBI in Dec 2023. 
The case involved alleged manipulation of trades in Nifty options in 2017 between Reliance Strategic Investments and Morgan Stanley France SA.  

SEBI had fined Reliance Industries in June 2017 for violating certain trading regulations. Jio Financial Services appealed SEBI’s decision.  
SAT ruled that SEBI did not properly consider the evidence and that the trades were not proven to be manipulative. The tribunal said there was no clear evidence of an agreement to manipulate the market, so the penalty could not stand.  

This ruling follows another recent SAT decision where penalties against Mukesh Ambani and others in a separate case were also overturned.  

Conclusion:  

Jio Financial Services Limited operates through various subsidiaries across multiple business sectors, many of which are still in their early stages. Despite consistently reporting profits, the company’s valuation seems elevated. The future is definitely going to be interesting for this venture. In the meantime, we advise investors to exercise caution and carefully evaluate their decisions before making any commitments.  

Savart is a SEBI-registered investment advisor. The purpose of this content is to educate, not advise or recommend any particular security. Please remember that investments are subject to market risks. Please conduct thorough due diligence or seek professional guidance before making any investment. Do not believe in any speculations.