Jio Financial shifts its focus to secured lending

Highlights

• The company shared its product launch plans post its Q3 FY24 earnings


• Focus will be on secured lending


• Plan to launch supply-chain financing


• Huge consolidated net worth of Rs 1,15,000 crore


• Awaiting AMC licence from SEBI


• JFSL has the potential to create enough value for shareholders

Jio Financial Services (CMP: Rs 267; Mcap: Rs 169,505 crore; Rating: Neutral) posted a consolidated net profit of Rs 294 crore in Q3 FY24. The numbers are not comparable with last year. However, relative to the previous quarter (Q2 FY24), there has been a sharp decline in profits in the absence of dividend income, the share of income from associates and joint ventures, and an increase in operating expenses.

As the financial services business was spun out recently from Reliance Industries and is yet to begin its full-fledged operations, the quarterly earnings are not of much consequence as of now. That said, the importance of the resulting entity (JFSL) can’t be played down. That’s because Reliance is dominant in the sectors it operates. RIL’s telecom unit (Jio Telecom) started from scratch to become India’s largest telecom operator in just seven years.  In retail, RIL’s subsidiary has emerged as one of the largest in the country in terms of reach, scale, and profitability. So all eyes are now on the new venture in financial services.

JFSL’s earnings call, post its Q3 FY24 earnings, threw some light on the company’s initial launches.

Lending business — focus will be on secured products

The broader strategy of Jio Financial Services is to democratise financial services by offering simple, innovative, and intuitive products, which will be delivered digitally. Its aim to serve the needs of two categories of customers — merchants and end-consumers.

JFSL is likely to leverage RIL’s large customer base in telecom and retail business and the technology capabilities of the group.

While JFL plans to provide a full stack of unsecured and secured loan products, the focus will be on secured lending. The RBI’s decision to increase risk weights on unsecured loans has made the company’s approach more cautious.

It plans to form a separate subsidiary for finance and operating leases for consumer devices (airfiber, phone, laptop). It is foraying into supply-chain financing solutions to address the working capital needs of suppliers and plans to add secured products such as loan against shares (LAS) and mutual funds.

Its distribution approach will be direct to the customer, digital or at points of sale (POS) embedded in the customer journey. JFSL has enough dry powder to scale the lending business. JFSL’s net worth stood at Rs 1,15,500 crore as of end September’23 which it can leverage to scale up the lending business. Moreover, JFSL is likely to have a top-notch credit rating (AAA). Consequently, it can raise debt at a competitive rate which can be an edge over many other NBFCs and fintech players.

Other business segments

JFSL has partnered with 27 insurers (both life and general insurers) for insurance broking. In the payments business, it re-platformed to launch a digital savings bank account and did a soft launch of the debit card.

In payment solutions, it did a pilot launch of Jio Voice box.

Earlier, JFSL entered into a 50:50 joint venture with Blackrock to form an asset management company (AMC). Both the companies are investing $150 million each in the venture.

Other important takeaways

•  JFSL has applied to the RBI to convert to a CIC (core investment company) from an NBFC.


•  It has applied to SEBI for an AMC (asset management company) licence.

Outlook and valuation

In terms of valuation, the stock is now trading at 1.5 times the book value of the consolidated entity (as of September end, much lower than the towering valuation of Bajaj Finance that trades at over 8 times FY23 book value.

While Bajaj Finance is a well-entrenched player, JFSL’s strong parentage, huge capital base, and the potential to cross-sell financial products to the large customer franchise of retail and telecom business offer immense growth opportunities. JFSL’s execution capabilities in the financial services space will  unravel in the future. However, investors can surely expect more value/wealth creation in JFSL, given the promoter’s unmatched capability to execute large and complex projects across sectors.

Long-term investors should keep the stock on their radar.

Follow @nehadave01

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