In this week's wrapup, we dive into Reliance’s latest attempt to demerge its financial services division and maybe disrupt the industry.

But before that, here's a quick video explaining how and why Zerodha funded us (Finshots + Ditto). Do check it out. It's a very interesting story and there's a few lessons for aspiring entrepreneurs here too.

The Story

Reliance Industries (RIL) has a “Buy 1 get 1” offer. And everyone wants a piece of this deal!

Okay, it’s not that dramatic.

But let’s spell out what’s happening — Reliance has finally decided to demerge its financial services business. And it’ll then list this as a separate entity on the stock exchanges in a few months. It’ll be called Jio Financial Services (JFS). So if you hold 1 share of RIL in your account on the 20th of July, you’ll be entitled to 1 share of the new JFS. It’s a 1:1 demerger ratio.

And investors are excited because it’s really a sparkling new piece of business to bet on. At the moment, financial services contribute a puny ₹1,500 crores in revenues. It’s a drop in the Reliance bucket. So investors are getting the opportunity to jump in on the ground floor of the elevator in the Reliance empire.

So, why’s Reliance doing this now, you ask?

Well, we can’t say for sure, but there are some theories floating around.

The most cynical one is that the Reliance Industries stock price has been fairly lacklustre in the past couple of years. There haven’t been big triggers that have pushed the prices north. So it’s a way to drum up some demand. After all, people will rush to buy the stock just to get their hands on the JFS shares too, right?

But that’s a myopic view. Sure, the stock price has risen over 5% since the announcement. But Reliance had already dropped hints of such a listing a few years ago. And it has been playing the stock market game for decades now. So you’d have to believe that it doesn’t need to resort to cheap tricks.

The other more plausible theory is that Mukesh Ambani doesn’t want to deal with issues of leverage. You see, most finserv companies first need to borrow money before they can lend it out. And this adds to the debt burden. If the finserv company is grouped alongside other diversified businesses, investors could look at the debt levels at the overall company level and be circumspect. It could be quite a drag if that were to happen.

By demerging and listing JFS, it kind of negates this problem.

Also, Reliance can attract a whole new set of investors to this business. Big institutional players might want to ride India’s fintech wave but may not want a piece of oil and gas or retail. They won’t have to worry about ESG factors either. It’ll kind of be like how Reliance got Meta and Google to invest in Jio Platforms by promising them a clean slice of digital India.

But will JFS be successful?

Well, we don’t know that yet. It’s tough to bet against the man who disrupted the telecom industry in one swift move. So let’s lay out a couple of things for you.

Firstly, Reliance is not scrimping on its team. It first hired the legendary KV Kamath of ICICI Bank fame as its Chairman. And he, in turn, has been adding seasoned pros from the banking industry too. So you can’t really say that Reliance won’t have the chops to run the show.

Secondly, if you assume that distribution is king for financial services, there is no one who is better placed than Reliance currently. JFS will have immediate access to a captive audience — the 400 million users of Jio telecom, the thousands of Reliance Retail stores that see an annual footfall of nearly 800 million people, and the 2 million merchants onboarded on the JioMart grocery platform.

So the opportunity is there for the taking. Especially if you consider that rough estimates suggest 50% of Reliance’s customers avail credit. But since Reliance hasn’t really built a sizeable financial service presence yet, most of them probably rely on folks like Bajaj Finance. As per what one RIL executive told Business Standard: “Currently, Reliance is the originator of the credit business from its consumers, but it is fulfilled by other financial services companies… They pay Reliance a nominal fee, which is passed on most of the time to the consumers at a lower price. We understand the business and have expertise but we don’t do it on our own.”

With JFS entering the picture now, that will change. Reliance will earn more than just a fee now. And could snatch away business from rivals.

And finally, it has all the requisite finserv building blocks in place too.

For instance, a company has to ensure that it is able to source funds at a low cost. Only then can it lend money out at low rates too and be competitive. Now Jio is backed by Reliance so it’ll have a top-notch credit rating of AAA from the get-go. That makes its job easier. Especially since only 5 other large NBFCs have that rating.

Then there’s the matter of ensuring that you’re being sensible with underwriting. That you’re not doling out credit on a whim and that you’re ensuring that the folks who borrow can pay it back on time. And let’s just say that there’s probably no other company in India right now that has access to the kind of consumer behaviour data that Reliance has. It has businesses in just about every segment and can quite easily track spending behaviour. That has got to help a financial services company make an assessment, right?

And to deal with all this, don’t forget that there are deep pockets at play too. Reliance is basically going to hand over a bunch of its own shares to its financial services entity. That means JFS will own roughly 6% of RIL and by virtue of that value, it starts off with a net worth of over ₹1 lakh crore. Just like that, it probably becomes the fifth-largest financial services company in India in terms of net worth.

So yeah, you can see why investors in other financial services companies are already a little jittery.

After the announcement, Both Bajaj Finance and Paytm shares dropped in value. Sure, that could be a mere correlation. But it’s hard to simply call it a coincidence. It does seem like everyone is a little wary of the Reliance juggernaut.

But despite all these tailwinds, we do have to point out that there’s still massive competition in the space. Everyone’s trying to be a lender these days. On the merchant side, we have Paytm with a bigger merchant network than Reliance. And it also says that it has only scratched the surface of lending here. And there’s Bajaj Finance which is top of mind for most consumers. And finally if you’re hoping for a telecom-like disruption, that’s going to be even harder. Because here, Reliance could be competing with banks too. And while JFS may probably try to get its hands on a banking licence, the RBI isn’t very keen on big corporate houses running banks. They’re fine with them managing just NBFCs for now. And as Macquarie Research points out, an NBFC licence won’t allow it to raise cheap deposits from customers. So its cost of funding will be higher than the banking channel. And that means it can’t really undercut them by much by offering extremely low-rate loans either.

Then there’s the inevitable foray into insurance, broking, and asset management. You can bet that JFS will have stiff competition in each of these segments too.

Which brings us to the big question — should you buy RIL just to get your hands on Jio shares?

Honestly, you should invest in a company only if you truly believe in its prospects. And not because it’s offering you a shiny deal. We don’t even know what’s the roadmap for JFS yet. Or how it plans to go about building the pieces of the finserv puzzle. So in a way, it’s quite a speculative bet.

But, on the flipside, you could argue saying, “I’ll sell the RIL shares soon enough and just hold JFS. Otherwise, who knows, there might be a mad rush for non-RIL investors to buy JFS on the day it lists and that could push the price up. International indices like FTSE have already added the stock to their global indices. So once it starts trading, index funds will try and lap up the stock too.” And if you’re going to buy a stock once everything about its future is already mapped out, you might have to shell a premium.

So yeah, we don’t know the right answer. We’ve laid out some of the factors for you. And now you have to make the decision — is it worth taking a punt on the Reliance brand in the hope of another disruption? What do you think?

Until then…

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