21 November 2022 India

EQUITIES India Financials

Macquarie Banking and Insurance Coverage
The Jio juggernaut – Can it rule the roost?
Universe
Reco CMP FY24E FY24E TP TSR
(Rs) ROE P/BV (Rs) (%) Key points
Private banks
(%)
 After demerger, Jio Financial Services (JFS) could be the fifth-largest
AXSB N 859 15.6 1.8 790 -8% financial services company in terms of networth.
HDFCB
ICICIBC
OP 1,614
OP 920
17.6
16.1
2.7
2.9
2,005 24%
1,050 14%  It has a large distribution network and customer ecosystem.
IIB
KMB
OP 1,129
N 1,960
15.7
12.5
1.4
3.3
1,400 24%
1,860 -5%
 Risk of disruption: Banks least at risk; NBFCs and fintechs most at risk.
YES UP 17 6.1 1.1 9 -47%
CUBK OP 183 14.0 1.6 220 20%
PSU banks JFS – The next big behemoth to disrupt the financial ecosystem?
BOB N 163 11.3 0.9 155 -5%
SBIN OP 603 16.7 1.4 695 15% • Reliance Industries (RIL) recently made an announcement to demerge its
NBFCs financial services business and rename it Jio Financial Services (JFS). RIL
HDFC OP 2,667 12.2 3.3 3,060 15%
LICHF OP 374 12.1 0.7 430 15% would transfer 6.1% RIL shares held by its wholly owned subsidiary to JFS.
SHTF N 1,251 13.4 1.0 1,380 10% This clearly shows the grand ambitions the group has in financial services.
MMFS N 202 11.1 1.2 215 6%
CIFC OP 714 19.1 3.6 860 20% JFS will differ from most other fintechs, as it will have access to huge amounts
SBICARD OP 793 27.6 5.9 1,200 51% of data, gathered from non-financial relationships; it can process and analyse
BAF UP 6,792 20.8 6.4 5,275 -22%
Insurance
this data in real time, to offer financial services, similar to Alibaba, Amazon,
HDFCLIFE OP 532 18.6 2.5 655 23% Apple, Facebook and Google. Also, unlike other fintechs, JFS will have a large
IPRU OP 470 15.5 1.6 580 23%
SBILIFE OP 1,243 20.3 2.2 1,580 27%
balance sheet, not be asset-light and eventually manufacture most product
LICI OP 639 10.0 0.7 850 33% offerings, giving it a significant competitive advantage, in our view.
ICICIGI UP 1,137 17.4 4.6 995 -12%
Microfinance Widespread disruption potential: banks could hold their ground
BANDHAN OP 216 22.1 1.6 390 80%
Fintech • JFS could be the fifth-largest financial services company in India in
PAYTM UP 547 -26.6 4.8 450 -18% terms of networth; it has significant scope for balance-sheet expansion:
Source: Company Data, Macquarie Research, November Assuming the 6.1% stake in RIL is realised over time, with a Rs1trn networth,
2022; Prices as of 18 November 2022
JFS could be the fifth-largest financial services firm in India. RIL already has a
NBFC licence which it can leverage to kick start consumer/merchant lending in
a big way. Also, IRDA has been open to giving insurance licences and RIL
Jio FS could be the fifth-largest financial
may get into insurance verticals. JFS can be a real threat to fintech business
services company in India
models as well as NBFCs, in our view. JFS not only can offer attractive rates
in merchant lending and digital unsecured lending markets, but also be
3,775
4,000
3,500 3,049
reasonably competitive in the secured lending market eventually, in our view.
• Large distribution network: Reliance group has a network of more than
3,000
2,500
1,825
2,000
1,500 1,249
1,049 988 918
15,000 stores across several formats (supermarkets, digital stores, etc) and a
771 705
1,000
500
509 480 vast customer base of 400mn+ in telecom and 200mn+ in retail (there could be
-
overlaps here). JFS can leverage on network effects and in concept be a
formidable threat for incumbents.
• K V Kamath – the man who built ICICI is at the helm of affairs: With K V
Kamath appointed as the Chairman, JFS’s growth pursuits are likely to be
Net Worth (INR bn)
aggressive. Kamath has a legacy of spotting newer markets and opportunities
Source: Company data, Macquarie Research, November based on his past track record and can scale up JFS’s business verticals.
2022; Note: Data is as of 2QFY23. We have added HDFC
Ltd and HDFC Bank combined NW. For JFS we have Banks still the best plays to thwart competition from JFS
assumed 6.1% shares that it holds at market value as
realisable NW. • Considering banks have significant cost of funds advantage and ability to do a
lot more business that NBFCs cannot do, JFS’s impact on the banking sector
Analysts could be a bit more moderate. We remain positive on HDFCB and ICICIB in
Macquarie Capital Securities (India) Pvt. Ltd. the longer run and they are our top picks in the sector. Among NBFCs/fintech,
Suresh Ganapathy, CFA +9122 6720 4078 BAF and PAYTM could be the most at risk.
suresh.ganapathy@macquarie.com
• While the scope for RIL to disrupt the financial services industry may be high,
Aditya Suresh, CFA +9122 6720 4129 the path to profit has to be significantly de-risked. Further we would prefer a
aditya.suresh@macquarie.com
more focussed capital allocation strategy around energy transition and digital
Param Subramanian +9122 6720 4099 infrastructure themes. For RIL, our price target is unchanged at Rs2,000 and
param.subramanian2@macquarie.com
we maintain Underperform with our EPS estimates ~30% below consensus
and an already sub-par 6% ROE outlook; see here.
Please refer to page 17 for important disclosures and analyst certification, or on our website
www.macquarie.com/research/disclosures.
Macquarie Research India Financials

JFS could be the fifth-largest financial services institution

The Board of directors of Reliance Industries Ltd (RIL) on 25th October approved a Scheme of
Arrangement among RIL, Reliance Strategic Investments Limited (RSIL) and their respective shareholders
and creditors in terms of which, RIL will demerge its financial services undertaking into RSIL (to be
renamed Jio Financial Services Limited). Jio Financial Services (JFS) would eventually be listed on the
Indian stock exchanges. RSIL is currently a wholly owned subsidiary of RIL and is RBI-registered non-
Deposit taking Systemically Important (ND-SI) Non-Banking Financial Company. The investment of RIL in
Reliance Industrial Investments and Holdings Limited (RIIHL), which is a part of the financial services
undertaking of RIL, will stand transferred to JFS. RIIHL is the ultimate beneficiary of 6.1% RIL shares
through its interest in Petroleum Trust and Reliance Services and Holdings Limited.

Fig 1 RIIHL is the ultimate beneficiary of 6.1% treasury Fig 2 …This holding will be transferred to Jio Financial
shares of RIL… Services, once it is demerged

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

Assuming the 6.1% shares of RIL which JFS will hold post the de-merger, JFS in terms of networth could
be the fifth-largest financial institution in India. This shows the ammunition it has to scale up its lending,
insurance, broking and many other verticals that it desires to achieve. Note that we haven’t assumed any
haircut here on RIL shares and assumed the entire holding is taken as networth. We assume that JFS
eventually would dispose off the stake in RIL to meet regulatory capital norms and shore up the balance
sheet. As per RBI rules and regulations, MTM gains cannot be taken as a part of capital adequacy
calculations. Also, any investments in associates will have to be deducted from Tier-1 capital to arrive at
capital ratios. Hence, JFS has to book gains from stake sale and shore up the capital base.

Fig 3 Estimated networth of JFS assuming 6.1% shares of RIL is taken as networth

4,000 3,775

3,500
3,049
3,000
2,500
2,000 1,825

1,500 1,249
1,049 988 918
1,000 771 705
509 480
500
-
HDFC Bank- SBI - std. ICICI Bank Axis Bank Jio FS PNB BoB Kotak bank Canara Bank IndusInd BAF
HDFC
Merged

Net Worth (INR bn)

Source: Company data, Macquarie Research, November 2022

Note: Data is as of 2QFY23. We have added HDFC Ltd and HDFC Bank combined NW. For JFS we have assumed
6.1% shares that they hold at market value as realisable NW

21 November 2022 2
Macquarie Research India Financials

How did Reliance disrupt the telecom industry?

Before we begin any discussion on how JFS may disrupt the financial services sector, it is important to
understand how RIL made an impact in the telecom sector.

RIL’s disruption of the India telecom industry is a classic case of the company taking an entire industry
head-on at scale with an aggressive pricing strategy to gain market share aggressively. RIL launched its
telecom business (Jio) in 2016 and is already the largest player (in terms of subscribers) in the industry.
RIL’s initial aggressive pricing meant that EBITDA margins for large players (like Bharti, see Fig below),
saw a sharp initial decline over the first two years post Jio’s entry. RIL’s entry into the telecom space was
also one of the key factors that drove consolidation in the industry (Vodafone-Idea merger – announced in
2017) and telecom players outside the top-2 (Jio & Bharti) were the key losers in Jio’s price-based market-
share onslaught.

Fig 4 Reliance Jio entered the telecom industry in 2016, and Fig 5 …Bharti’s EBITDA margins fell sharply for the first
gained market share aggressively two years post Jio’s entry

Subscriber Market Share Bharti Airtel

80% 180,000 55%
70% 160,000
50%
60% 140,000
45%
50% 120,000
100,000 40%
40%
80,000 35%
30%
60,000
20% 30%
40,000
10% 25%
20,000
0%
0 20%
1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22

1Q17
2Q17
3Q17
4Q17
1Q18
2Q18
3Q18
4Q18
1Q19
2Q19
3Q19
4Q19
1Q20
2Q20
3Q20
4Q20
1Q21
2Q21
3Q21
4Q21
1Q22
2Q22
3Q22
4Q22
1Q23
Reliance Jio Bharti Airtel Others
EBITDA (Rs million) EBITDA Margin

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

The main difference between telecom and financial services industry however is more regulatory scrutiny
and a strict licensing regime. To that extent, disruption in the telecom sector cannot be fully extrapolated to
the financial services industry. For example, the probability of JFS getting a banking licence is very low in
our view and hence JFS may not be able to directly compete with banks and cause the kind of disruption
that we saw in the telecom sector.

21 November 2022 3
Macquarie Research India Financials

JFS – Bank disruption least likely in the medium term

The RBI, in general, has been reluctant in giving universal banking licences to corporate groups. RIL group
however has a payments bank licence, and the payments company may potentially be merged into JFS in
time, in our view.

By virtue of not having a banking licence, deposits, which is the cheapest form of funding for banks and
gives a significant advantage over any other financial services intermediary, would not be accessible for
JFS. JFS unlike some NBFCs also can’t raise any retail term deposits as the RBI stopped giving deposit-
taking NBFCs licences largely post 2000. JFS also can’t offer any transaction banking services and
plethora of other products which banks are allowed to offer.

Consequently, JFS could be more aggressive and compete more with fintechs, insurance companies,
broking, AMCs, etc, where it has a licence or can easily get a licence from the regulator, in our view.

Secured loans remain the key forte of the banking sector. JFS, in our view, would enter more into
unsecured consumer finance rather than venturing aggressively into secured finance like housing and
vehicle finance, as that requires a more intense, time consuming, physical presence and setting up a
collection and repossession infrastructure could take time.

As a result, we don’t envisage banks to get affected significantly in the medium term due to the regulatory
arbitrage that they enjoy.

Having said that, JFS clearly has spelt out its ambitions to scale up the merchant financing segment in the
smaller merchants category. While banks have closer to 15-20% of the overall SME segment, the smaller
merchant category defined as micro, small and medium industry credit which forms ~6% of the overall
book of banks in India, has been growing at a rapid pace of 20%+ over the last couple of years.

Fig 6 Smaller industry credit has been growing at a rapid pace for banks

40%
35%
30%
25%
20%
15%
10%
5%
0%

Micro, small and medium industry credit

Source: RBI, Macquarie Research, November 2022

Could JFS compete on unsecured lending with banks?

One of the segments where JFS could compete with banks is unsecured lending which has been growing
at a faster pace in general and forms around ~10-15% of the loan book of private sector banks. However,
there are some important differences here. Part of unsecured lending happens through credit cards where
the value proposition is different. While JFS can apply for a credit card licence, as of now RBI hasn’t given
any credit card licence to NBFCs except for two bank-sponsored credit card companies SBI and BOB.
Also, banks largely do unsecured lending. Nearly 70-80% of the personal loans that banks do are to
internal liability-based customers where lending is done at very attractive yields (for the consumer) as they
have complete customer insights on savings and expense patterns. We believe JFS could compete more
on the unsecured lending done by NBFCs and fintechs than banks as it would be difficult to compete on
risk-adjusted pricing to the kind of customers that banks cater to. While there will be some impact, we
believe banks largely should be able to manage the competitive intensity coming from JFS.

21 November 2022 4
Macquarie Research India Financials

Fig 7 Unsecured loans in general have been growing faster than secured loans for banks

40% Secured Retail Index YoY growth

(%)
35% Unsecured Retail Index YoY
growth (%)
30%

25%

20%

15%

10%

5%
Sep-12

Sep-13

Sep-14

Sep-15

Sep-16

Sep-17

Sep-18

Sep-19

Sep-20

Sep-21

Sep-22
Mar-13

Mar-14

Mar-15

Mar-16

Mar-17

Mar-18

Mar-19

Mar-20

Mar-21

Mar-22
Source: RBI, Macquarie Research, November 2022
Note: Secured Retail Index: Housing, Advances against fixed deposit, vehicle loans, Advances to individuals against
shares/bonds, Gold Loans. Unsecured Retail Index: Consumer durables, Credit cards, Education, Other personal loans

Fig 8 Unsecured loans have been growing at a fast pace for the top-3 private sector banks

60%

50%

40%

30%

20%

10%

0%

-10%

ICICI HDFCB Axis Bank

Source: Company data, Macquarie Research, November 2022

21 November 2022 5
Macquarie Research India Financials

NBFCs: Can Jio launch a moat attack on Bajaj Finance?

In the lending space, Jio Financial has articulated that it plans to “launch consumer and merchant
lending business based on proprietary data analytics to complement and supplement the traditional credit
bureau-based underwriting ... This coupled with a strong capital base and unparalleled digital
infrastructure capabilities would enable JFS to offer a differentiated value proposition for its customers.”

While it is too early to take understand the exact customer segments and target markets that Jio Financial
plans to cater to, it seems clear that it will be focused on consumer and merchant lending, which is the
mainstay of NBFCs like Bajaj Finance and fintechs like Paytm.

Jio Financial will have a significant advantage over other NBFCs due to its deep-pocketed parentage,
which brings with it advantages such as:

• AAA credit rating, which only six other large NBFCs have, and consequently low funding cost.

• Strong and well-capitalised balance sheet: As demonstrated earlier, JFS’s Rs1trn+ networth (after
sale of 6.1% RIL treasury shares), would make it the most highly capitalised NBFC.

• Very large distribution footprint (discussed below) and a large captive base of customers through its
Retail & telecom franchises, as well as a very large merchant outreach.

• Strong ability to attract top-notch talent as the largest Indian conglomerate.

However, lending is ultimately a human resource intensive business, and JFS’s capabilities on execution
will only become clear with time. The NBFC business model has been a treacherously difficult one for most
conglomerates that have entered the space, with Bajaj Finance and Chola Finance being the standout
exceptions. However, RIL has demonstrated its hunger for attaining scale in the past in other businesses,
and in our view, can pose a significant growth and market-share risk for players like Bajaj Finance and
Paytm with whom it could be competing head-on.

Fig 9 RIL has an AAA rating, which only six other large NBFCs have

CRISIL Credit ratings of top NBFCs

AAA AAA AAA AAA AAA AAA AAA
AA+ AA+ AA+ AA+
AA
Reliance Industries

Tata Capital
LIC Housing

AB Capital

Muthoot Finance

Chola Finance

Mahindra Finance

PNB Housing
HDFC Ltd

Bajaj Finance

HDB Financial

Shriram Transport

Source: CRISIL, Macquarie Research, November 2022

The advantage that JFS will have is that it can use the parentage of RIL and borrow at very attractive rates
and be competitive in the lending space. The table below shows the spread at which RIL borrows relative
to G-secs in bond markets compared to some of the other AAA and AA+ rated NBFCs.

21 November 2022 6
Macquarie Research India Financials

Fig 10 RIL’s incremental bond issuance coupon rates have been at lower spread vs G-sec
Corresponding G-sec
Date Company Tenure Coupon rate (%) Spread vs G-sec (bps)
yield at the time (%)

5/01/2022 RIL AAA 5 years 6.2 5.9 35

12/10/2022 HDFC Ltd AAA 10 years 8.1 7.4 63
18/07/2022 HDFC Ltd AAA 5 years 7.8 7.2 61
2/06/2022 HDFC Ltd AAA 3 years 7.9 7.0 88
18/08/2022 LICHF AAA 3 years 7.4 6.7 67
18/08/2022 LICHF AAA 10 years 7.9 7.2 61
23/06/2022 LICHF AAA 5 years 7.9 7.2 68
21/11/2022 CIFC AA+ 3 years 8.5 7.0 142
18/05/2022 CIFC AA+ 5 years 8.0 7.2 80
Source: Bloomberg, Macquarie Research, November 2022

21 November 2022 7
Macquarie Research India Financials

Unparalleled distribution footprint

Reliance Retail has a very large distribution footprint of 15,000+ stores (as of FY22), as shown below. This
makes it the largest retailer across all its categories (consumer electronics, grocery/supermarkets, fashion
etc). This can give significant impetus to JFS’s plans of scaling up consumer and merchant lending, in our
view.

Fig 11 Reliance Retail – Total store count and split (FY22)

Source: Company data, Macquarie Research, November 2022

Reliance Digital is the largest consumer electronics retailer in India, as shown below. Reliance Digital
would also be a major contributor to BAF’s customer acquisition engine, in our view, as BAF finances
customers here at the point-of-sale.

Fig 12 Reliance Digital is the largest consumer electronics Fig 13 While we do not have specific disclosures on
retailer in India, and would be a big customer acquisition Reliance Digital’s revenues, it should be materially higher
channel for BAF than peers, considering its distributive footprint

Consumer Electronics retailers - Revenue (Rs bn,

Consumer Electronics retailers - Store Count FY22)
600 100
500+ 90
500
80
82
70
400
60
300 50
53
195 40
200 44
121 30
105 88 20
100
10
?? 9
- 0
Reliance Croma (Tata) Vijay Sales Electronics Aditya Vision Reliance Croma (Tata) Vijay Sales Electronics Aditya Vision
Digital Mart India Digital Mart India

Source: Company data, Macquarie Research, November 2022 Source: Company data, Electronics Mart India RHP, Macquarie Research,
November 2022

21 November 2022 8
Macquarie Research India Financials

Reliance Retail also runs one of the largest grocery / supermarket retailers in India as shown below.
Reliance Retail’s unparalleled distribution franchise through its strong retail customer and merchant
network could provide it a large captive customer base for its lending franchise.

Fig 14 RIL also runs one of the largest supermarket / grocery chains in India

Large supermarket / grocery retailers in India

1,000 917
900
800
700
600
500
400+
400
302 285*
300
200 157
67 48
100
-
More Retail Reliance DMart Big bazaar + Spencer’s Food world Star Bazar
SMART Hypercity Retail
Source: Company data, Macquarie Research, November 2022; *from FY20 annual report

We had highlighted in our Bajaj Finance initiation report that financing of consumer durables is the key
customer acquisition and engagement engine for BAF. While this business is just ~10% of Bajaj’s overall
AUM, the company heavily relies on this vertical as a customer acquisition engine, which it can later cross-
sell personal loans to. As we can see below, NBFCs have been losing market share in consumer durable
financing over the last few years. BAF’s management has also recently admitted to losing market share in
consumer durable financing.

With the entry of Jio Financial, the competitive intensity in the consumer financing space will only increase.
Moreover Reliance Digital, the largest consumer electronics retailer in India, would naturally also be one of
BAF’s bigger customer acquisition channels (we do not have specific numbers on share). So, an
aggressive entry by JFS in this segment can potentially hurt BAF’s growth prospects, in our view.

Fig 15 NBFCs (largely BAF) have been losing market share Fig 16 Bajaj Finance management has admitted to losing
in consumer durable financing market share in consumer durable financing

Market share in Point-of-Sale consumer durable

loan disbursements “…As I said earlier, I used to see 4 lenders at the store and now I see
100% 16. And if I was to tell you that we are holding our market share…you may
14% 14% or may not agree with me, but we're doing everything we can to defend our
90% 18% 22% market share, so that is point number one I would make.
80%
70%
Would I believe that we would have lost some share? The answer is
60% yes, because of just versus 4 the number goes to 16 and we are a very,
50% very dominant player at the store or in that line of business. It's like Maruti
86% 86% used to be a long, long time ago and numbers had to go down from
40% 82% 78% where their dominance used to be. So that's point number two.
30%
20%
Specific market share whether -- if a competitor gives you the data or I give
10% you is of no consequence.”
0%
FY19 FY20 FY21 FY22
NBFCs Private banks
Source: CRIF Highmark, Macquarie Research, November 2022 Source: Bajaj Finance 2QFY23 conference call, November 2022

JFS could increase competitive intensity in personal loans space further: Personal loans industry
has been growing at a strong pace (25% CAGR) over the past five years, as shown in the figure below.
Bajaj Finance is currently the largest NBFC player in this space, which is largely dominated by banks.
Banks have been secularly gaining market share in this segment, while Bajaj has broadly maintained its
market share over the past five years.

21 November 2022 9
Macquarie Research India Financials

Going forward, we expect banks to continue gaining market share in this segment as they gain on
competitiveness vs NBFCs in a rising interest rate regime. Moreover, with the entry of JFS, a deep-
pocketed player, into consumer lending, competitive intensity in the space is set to increase even more,
which could detrimentally affect the growth outlook of players like BAF.

Fig 17 Personal loans industry has seen strong 25% loan Fig 18 …Top-3 banks have been gaining market share in
CAGR since FY18… personal loans

Personal loans industry (Rs bn) Top 3 banks (HDFCB, ICICI, SBI) Bajaj Finance Other players
7,000
6,247 100%
90% 19% 17% 16%
6,000 23% 23%
5,038 80% 12%
11%
12% 13%
5,000 70% 13%
4,463
60%
4,000 3,540 50%
40%
3,000 2,549 68% 72% 72%
30% 66% 65%

2,000 20%
10%
1,000 0%
FY18 FY19 FY20 FY21 FY22
0
FY18 FY19 FY20 FY21 FY22
Source: Company data, Macquarie Research, November 2022; Includes Source: Company data, Macquarie Research, November 2022; Includes
consumer durable loan financing for Bajaj Finance consumer durable loan financing for Bajaj Finance

RIL’s consumer and merchant base is vast: We have shown below data on RIL’s existing customer
base, which could potentially form the pool of customers that JFS can tap into for providing financial
services. RIL’s telecom and retail customer bases are vast compared to most banking and non-bank
lending franchises.

Fig 19 RIL has a sizeable customer base in telecom and Fig 20 Even compared to large lending franchises, RIL’s
retail customer base is formidable

RIL - Data on Customer base & transactions (mn) Total customer base (mn)
1,200 428
450
1,000 400
1,000 337
350
300
800 720
250 221

600 200
146
428 150
400 100 71 63
221 50
200 -
Reliance Paytm Reliance SBI (non HDFC Bank Bajaj
Jio Retail PMJDY , Finance
-
(Telecom) non
# of transactions - Annualised Jio - Telecom Registered
dormant)
Retail segment footfalls in retail customer base Reliance Retail
(annualised) segment customers

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

RIL also has a sizable 2mn merchant outreach – predominantly through JioMart’s Kirana store network.
These merchants currently source and procure FMCG items from Reliance Retail. Reliance Retail has
plans to scale up this network by 5x to 10 million over the next 5 years, which would make it comparable to
even large fintech platforms like Paytm.
This could potentially form a large pool of merchants to whom JFS can tap into for providing working
capital financing, in our view.

21 November 2022 10
Macquarie Research India Financials

Fig 21 Reliance Retail – 2mn merchants currently on platform, which company plans to grow 5x
to 10mn in next 5 years

Total merchant base (mn)

25
22

20

15

10 9

5
5
2

-
Total Paytm merchants Merchant outreach of Paytm - device Merchants onboarded on
HUL (India's largest merchants Reliance Retail platform
FMCG player)
Source: Company data, Macquarie Research, November 2022

21 November 2022 11
Macquarie Research India Financials

Non-lending financial services – how can JFS disrupt the space?

RIL has articulated that JFS will also “acquire liquid assets to incubate other financial services verticals
such as insurance, payments, digital broking, asset management… JFS will continue to evaluate organic
growth, joint-venture partnerships as well as inorganic opportunities in insurance, asset
management and digital broking segments.”

Insurance – General insurance could be the first one to see disruption

According to IRDAI norms, the minimum paid-up capital for life and general insurance businesses are
Rs1bn each. Capital will not be a constraint here anyway. They can easily set up two separate companies
for life and general insurance business. IRDA has been off late very open to allow entry of new players into
the insurance market in India. The goal of the new IRDA chief Debasish Panda is to drive insurance
penetration and growth.

While life insurance is a more capital-intensive business and a long gestation business and will take
significant expertise and time to develop scale and profitability, general insurance business is a short-term
business and JFS could quickly launch that business in our view. While profitability of general insurance
segment has been in question owing to large underwriting losses that one makes here, JFS at least to
begin with, can capture market share quickly.

Fig 22 Top-5 private players have roughly ~70% market share in terms of individual APE among
private life insurance market

SBI Life
Others 23%
32%

HDFC Life
15%

Tata Life
8%
Max Life IPRU Life
10% 12%

Source: Company data, Macquarie Research, November 2022

We have already seen some of the newer generation players with better technology and relatively lower
physical presence manage to leverage digital platforms and scale up their market share as evidenced by
the rapid rise of Acko and GoDigit.

21 November 2022 12
Macquarie Research India Financials

Fig 23 Smaller new generation players have rapidly increased market share

0.50%
0.45% 0.45%
0.40%
0.35%
0.30% 0.29%
0.25% 0.24%
0.20%
0.15% 0.15%
0.10% 0.09%
0.05% 0.04% 0.04%
0.02%
0.00%
FY19 FY20 FY21 FY22

Acko General Insurance Go Digit General Insurance

Source: IRDA, Macquarie Research, November 2022

Note: Market share is in terms if GWP = Gross Written Premium

Fig 24 Top-5 players have a market share of nearly ~60% in general insurance segment among
private players

ICICI-lombard
16%
Others
39%
Bajaj Allianz
13%

HDFC ERGO
13%
Reliance
General Tata-AIG
9% 10%

Source: IRDA, Macquarie Research, November 2022

IRDAI is also keen that the existing life and general insurance companies should not be seen as licence
targets. So, in case of mergers and acquisitions, preference is given to those who already have licence to
operate the business. Hence, most likely JFS will build this business organically to begin with and most
likely the initial rampup will happen through the general insurance business.

The top-5 private sector players in the life and general insurance market have closer to 60-70% market
share among private sector players. However, rest of the market is fairly fragmented and JFS can up the
ante and gain quite a good presence. If we look at the large players, roughly in the life insurance space,
premiums that they generate are 3-4x of their networth, whereas ICICI Lombard generates 2.0x of its
networth. Point we are trying to drive across is that with ~Rs100bn of NW in insurance business which is
roughly 10% of the Rs1trillion of potential capital/networth that JFS will begin with, it have ample scope to
be a strong player in the market and capture significant market share.

21 November 2022 13
Macquarie Research India Financials

Fig 25 Networth vs premium generated Fig 26 Premium to NW multiple

6.0x
5.1x
5.0x
4.1x
4.0x
3.0x
3.0x
2.0x
2.0x

1.0x

0.0x
HDFC Life SBI Life IPRU ICICI Lombard

Premium to NW multiple

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

Capital markets - AMC and broking industries

Capital markets businesses like AMCs and digital broking are different from other financial businesses, in
that they are not highly capital intensive. JFS can quickly disrupt these businesses by leveraging on its
vast customer base. The annual profit pool in AMC and broking industries are <US$1bn each, as we show
in the figures below. While the profit pool may not be significant here to capture, JFS will be looking at
these businesses to offer a complete range of products to its vast customer base.

As shown in the figures below, the top-3 mutual funds are all bank-led, despite the presence of large
corporate houses in this line of business (Tata MF, Birla MF, Nippon MF, etc). JFS could enter this line of
business through both organic and inorganic routes in our view.

Fig 27 Mutual fund industry is highly consolidated with top Fig 28 …Mutual fund industry has seen a sharp surge in
6 players enjoying ~60% market share… total customers through Covid, to ~36m now

Overall Mutual Fund AUM market share (Sep'22) Mutual fund industry - Unique investors (mn)
40.0
36.0
33.7
35.0

30.0
SBI MF, 18%
25.0 22.8
20.8
Others, 39% 19.3
20.0 17.1
ICICI Pru MF,
12% 15.0

10.0
HDFC MF,
11% 5.0

-
UTI MF, 6%
Nippon MF, FY18 FY19 FY20 FY21 FY22 1HFY23
Birla MF, 7% 7%

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

In digital broking, the new-age fintechs have significantly disrupted the business models of bank-led
brokers, through a relentless focus on lower cost-to-consumer and better technology. Fintech brokers have
gained market share aggressively, despite bank-led brokers having deep pockets, because of their focus
on delivering a superior product with a superior technological platform. We believe that if JFS is to make
significant inroads into this industry, it would probably be through the inorganic route.

21 November 2022 14
Macquarie Research India Financials

Fig 29 Broking industry has seen a big market-share shift Fig 30 …Like the MF industry, the retail broking customer
towards new age fintechs… base has seen a sharp surge through Covid, to ~37m now

Broking industry - Market share by active clients Broking industry active clients (mn)
40 37.4
36
35

30
Zerodha
Others 19%
25% 25
18.9
20

Groww 15
Kotak Sec 10.8
14% 8.3 8.8
3% 10
HDFC Sec
3% 5
ICICI
5Paisa Upstox
Sec 0
4% 12%
8% Angel One FY18 FY19 FY20 FY21 FY22 1HFY23
12%
Broking industry active clients (mn)

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

Fig 31 Total FY22 profit pool of the top 8 mutual fund Fig 32 …similar number for the retail broking industry was
players was at ~Rs64bn at ~Rs58bn

Source: Company data, Macquarie Research, November 2022 Source: Company data, Macquarie Research, November 2022

21 November 2022 15
Macquarie Research India Financials

K V Kamath – the man who scaled up ICICI; can he drive JFS?

As per RIL, the non-executive independent Chairman of JFS will be K V Kamath who will also have an
independent director Board seat in the parent company RIL.

K V Kamath took charge of ICICI Bank in 1996 and through a series of acquisitions built ICICI Bank. The
final main acquisition happened in FY02 where the parent institution ICICI Ltd which was a development
finance institution reverse merged with ICICI Bank. Post the reverse merger, the loan book increased ~7x.
After going through some sort of consolidation in FY03 and FY04, Kamath significantly scaled up the
balance sheet of ICICI Bank in subsequent years growing way faster than industry levels. To achieve such
super-normal growth rates on such a large balance sheet size was an enormous task. The growth was
driven largely by term loans which were basically capex led.

While ICICI Bank did have problems related to such aggressive expansion in the balance sheet few years
later post the GFC (global financial crisis) in 2008, the point here which we are trying to make is that
Kamath was a visionary when it came to spotting new businesses and new markets.

While one could question the way ICICI went about executing some of the businesses it entered or scaled
up, its ability to spot newer opportunities and markets and newer growth areas under Kamath were second
to none at that time.

Right from setting up of new businesses like life insurance, general insurance, AMC, international business
or for that matter rapidly scaling up the retail loans market, ICICI was in the front driven by Kamath in our
view.

Fig 33 ICICI Bank – Growth in loan book when K V Kamath was the CEO of ICICI Bank

70%

60%

50%

40%

30%

20%

10%

0%
FY03 FY04 FY05 FY06 FY07

Advances growth Term loans growth (capex cycle led) Banking system credit growth

Source: Company data, Macquarie Research, November 2022

What could be his role in JFS?

Though Kamath would be in a non-executive role here, his presence at the parent company RIL Board
level clearly shows the intent of the founder to scale up JFS in a big way. Financial services is one such
business where RIL hasn’t been in a position to make a significant impact.

With Kamath coming on board and being the Chairman of JFS, his first priority could be setting up a new
management team to scale up various verticals ranging from insurance, consumer and merchant lending,
broking, payments, etc.

21 November 2022 16
Macquarie Research
Important disclosures:
Recommendation definitions
Macquarie – Asia and USA
Outperform – expected return >10%
Neutral – expected return from -10% to +10%
Underperform – expected return <-10%
Macquarie – Australia/New Zealand
Outperform – expected return >10%
Neutral – expected return from 0% to 10%
Underperform – expected return <0%
Note: expected return is reflective of a Medium Volatility
stock and should be assumed to adjust proportionately
with volatility risk
Volatility index definition*
This is calculated from the volatility of historical
price movements.
Very high–highest risk – Stock should be
expected to move up or down 60–100% in a year
– investors should be aware this stock is highly
speculative.
High – stock should be expected to move up or
down at least 40–60% in a year – investors should
be aware this stock could be speculative.
Medium – stock should be expected to move up
or down at least 30–40% in a year.
Low–medium – stock should be expected to
move up or down at least 25–30% in a year.
India Financials
Financial definitions
All "Adjusted" data items have had the following
adjustments made:
Added back: goodwill amortisation, provision for
catastrophe reserves, IFRS derivatives & hedging,
IFRS impairments & IFRS interest expense
Excluded: non recurring items, asset revals, property
revals, appraisal value uplift, preference dividends &
minority interests
EPS = adjusted net profit / efpowa*
ROA = adjusted ebit / average total assets
ROA Banks/Insurance = adjusted net profit /average
total assets
ROE = adjusted net profit / average shareholders funds
Gross cashflow = adjusted net profit + depreciation
*equivalent fully paid ordinary weighted average
number of shares

Low – stock should be expected to move up or All Reported numbers for Australian/NZ listed stocks
down at least 15–25% in a year. are modelled under IFRS (International Financial
* Applicable to select stocks in Asia/Australia/NZ Reporting Standards).

Recommendations – 12 months
Note: Quant recommendations may differ from
Fundamental Analyst recommendations

Recommendation proportions – For quarter ending 30 Sep 2022

AU/NZ Asia USA
Outperform 61.09% 64.27% 70.97% (for global coverage by Macquarie, 3.62% of stocks followed are investment banking clients )
Neutral 32.76% 23.34% 26.88% (for global coverage by Macquarie, 4.59% of stocks followed are investment banking clients )
Underperform 6.14% 12.39% 2.15% (for global coverage by Macquarie, 0.00% of stocks followed are investment banking clients )

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Macquarie Research India Financials
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