Jio Financial Services demerger and listing a ‘key moment’ for Reliance stock

• The demerger of Jio Financial Services (JFS) in the coming months and listing on the stock exchanges is a ‘key moment’ for the Reliance Industries’ stock.
  
• The JFS demerger is expected to act as a catalyst that the parent Reliance Industries was missing, which is evident from the sagging stock price.
  
• JFS’ entry could also prove to be a challenge to existing players in the space like Bajaj Finance, Paytm and PhonePe, and a successful take off could also result in attrition at banks and non-banking financial companies (NBFC).

The demerger of Jio Financial Services (JFS) in the coming months and listing on the stock exchanges is a ‘key moment’ for the Reliance Industries’ stock, according to analysts at Nomura. Strong fundamentals and business outlook aside, shares of Reliance Industries (RIL) have gone nowhere since March last year. After hitting a fresh 52-week low in March this year, RIL shares are still down over 10% in 2023.

The JFS demerger could be just what the parent’s shares need – value unlocking. The JFS demerger is expected to act as a catalyst that the parent Reliance Industries has been missing.

“The listing and value unlocking from RIL’s financial services business in the coming months will be a key event for the stock,” said Nomura in its latest note, adding that the decline in Reliance’s shares is due to “index-related sell-off”.

According to the terms of the demerger announced in October last year, all existing shareholders of Reliance Industries will get one share in JFS for each share held in the parent company. The company has now called for a meeting of creditors and shareholders on May 2 for the requisite approvals. JFS is expected to list in September this year.

“As JFS scales up, it can drive value unlocking given higher multiples for peers in these industries,” Nomura said.

Jefferies has pegged the valuation of JFS in the range of ₹90,000 crore to ₹1.5 lakh crore, with each share of JFS valued at ₹179 in the brokerage’s base case scenario.

Demerger to help JFS ‘dominate’ the industry

Looking beyond the benefits for RIL’s shares, the JFS demerger will also help the financial services business attract investors and challenge existing players in the sector like Bajaj Finance and Paytm.

“The demerger would help the financial services business to attract different sets of investors, strategic partners and lenders having specific interests in the financial services business,” Nomura added.

Analysts at Jefferies underlined that JFS would be able to leverage the large distribution network, customer base and deep pockets of Reliance to take on existing players like Bajaj Finance, Paytm and PhonePe, among others. It will also allow JFS to emerge as the fifth largest financial services company in terms of net worth.



Reliance has already made several moves to give JFS the best possible start – this includes bringing in KV Kamath, the former non-executive chairman of ICICI Bank, as its chairman. Subsequently, Kamath hired a former ICICI Bank talent, Manish Singh, to help him build a team as JFS draws closer to launch. Analysts are already watching for attrition at banks and non-banking financial companies or NBFCs.

JFS to focus on consumers and merchants

Leveraging Reliance’s wide reach in consumer and retail segments thanks to Reliance Jio and Reliance Retail, JFS is expected to focus on consumers and merchants as it kicks off its innings post the demerger.

“JFS' key advantage will be low funding cost/ better access on the back of the group's high credit rating and ownership of 6.1% stake in RIL,” said Jefferies.

Reliance’s retail arm reported 201 million footfalls across its network of 17,225 stores in Q3, which is an increase of nearly 26% year-on-year. Its telecom arm, Reliance Jio, has been the market leader for several months now, with a total subscriber base of 426 million as of January 2023. This gives JFS a strong pool of consumers to dip into.

The recent acquisition of Metro Cash & Carry will also give the company access to 3 million merchants, of which 1 million are frequent buyers.

Upcoming Reliance AGM could lay down the blueprint of JFS strategy

Reliance is expected to lay down the blueprint of its JFS strategy in detail at its upcoming annual general meeting (AGM), likely in August. This is ahead of the expected listing of JFS in September this year.

“While significant efforts are needed to scale the financials business, given RIL’s robust execution, capacity to invest, industry-leading retail infrastructure and leading market share across the retail and telecom industry, it appears likely that RIL will dominate the industry,” said the analysts at Nomura, expressing their optimistic outlook.

On the whole, analysts are bullish overall on RIL’s prospects and the JFS demerger, which has earned the company a stock price upgrade from analysts at Jefferies – to ₹3,100 from ₹3,060 earlier. Analysts at Nomura have given a target price of ₹2,850. The recent price correction has also prompted the analysts at JP Morgan to say that this is an “attractive entry opportunity”.

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