From a discovery price of Rs 261.85 per share to a closing price of Rs 212.25 per share on Friday, Jio Financial Services shares brushed against reality. Institutional investors, mainly mutual funds that own the stock, are understood to be selling the stock, leading to the drop. An 18% drop in stock prices is called a “technical correction.” The question is, should JFS stock get you excited, fundamentally?
History of JFS
In October last year, Reliance Industries announced the spin-off of its financial services business, which became part of Reliance Strategic Investments Ltd. RSIL was formed in 1999 when RIL’s shareholding structure changed. RSIL was selected as the entity to hold some of the remaining shares or treasury shares that arose during the process. It was never an operating entity with a predetermined business plan. In July 2023, RSIL changed its name to Jio Financial Services.
Unlike NBFCs, it has no loan assets in FY2023, nor does it have significant bank borrowings or liability structures typical of NBFCs. Only during FY2024 will investors be able to understand JFS’s financial status. What is certain is that JFS will have six subsidiaries and one associate, namely Jio Payments Bank, whose business model has yet to take off since its inception.
JFS is expected to make a splash in the consumer lending space, primarily servicing unsecured loans. The company has expressed interest in entering the insurance industry (both life and non-life) and recently announced its entry into mutual funds in partnership with BlackRock. BlackRock’s early cooperation with DSP focused on stock MF, but globally, its strength is in the field of small-profit passive funds. For JFS, the strategy or profitability will only be known when the product hits the market, though the exact timing is unclear.
As for the lending business, which is billed as a focus area for JFS, it has little to show for it other than having a shiny board including KV Kamath and a skeletal team of 29 staff led by ex-ICCI bank veteran Hitesh Sethia of the actual business plan. Note that in the lending business, unlike telecommunications or textiles, flooding the market with pricing or freebies can be difficult as there is a bottom line or minimum cost involved in borrowing costs.
According to the information memorandum, JFS’s net worth based on the latest financial data may give it a loan book or assets under management of around Rs 80,000 crore (4 times book value). Compared to Bajaj Finance’s AUM of over Rs 200 crore (generally considered an entity likely to face JFS disruption) or even Chola Finance’s Rs 1.13 crore AUM, the newly listed company is still a long way off Go find a place in the league table. It’s worth noting that RIL’s previous attempts, including a partnership with DE Shaw, haven’t helped the company make a splash in the financial services space. Again, it hasn’t been rising fast, nor has it experienced intense competition from other industries, aside from disruption in telecom. Example: Reliance Retail.
Should you buy JFS stock?
Fundamentally, there isn’t much evidence to support JFS’s investment thesis. It may have a fabulous business model, but that’s still on paper. Execution and collections teams, critical to the lending and insurance business, remain the critical missing piece. While JFS could be valued at 1.5 times fiscal 2023 book value (taking into account the market value of treasury stocks for valuation purposes), there is little data on how those numbers will change. It would be prudent for investors to wait a few quarters to understand its financials before considering the stock.
That said, once the technical rebalancing is over (expected September 1st), the pricing flaw may be resolved. Investors willing to take a long-term strategy, with a high risk appetite and a reasonable investable surplus may consider JFS stock. But do so at your own risk.