India - Banking & Fin
21 August 2023
Jio Financial Services: Decoding the unknown
Jio Financial Services (JFS) will be entering four businesses:
1) Retail lending 2) AMC 3) Insurance (Life, Non-life and
Broking) 4) Digital payments. We estimate JFS’s lendable net
worth to be $2.7bn (19% of consol. reported), and expect it to
initially target consumer durable, unsecured PL and small-
ticket merchant loans. We expect gradual scale-up (save for
any acquisitions), as it builds out physical and collections infra
(29 employees currently vs peers having 800-4k branches and
4-66k employees). Over the medium term, we expect JFS to
add larger ticket size and secured consumer, merchant and
MSME loans. Out of the $870bn total retail and SME lending,
the market size of these segments is $200bn. We do not expect
JFS to focus on mortgages over the medium term. Given the
relative underpenetration, JFS’s entry may not be disruptive
for other players’ growth prospects. But, it can potentially
dilute the high profitability of these segments, if JFS competes
on pricing. Our scenario analysis indicates JFS valuation of
Rs200-320/share ($15-25bn).
What businesses is JFS going to enter?
JFS’s information memorandum lays out four key businesses (Fig. 4)
that the company intends to target: 1) Retail lending 2) Asset
management 3) Insurance broking 4) Digital payments. Apart from
these, our channel checks indicate that the company is also seriously
considering entering the Insurance business. Within lending, JFS has
identified three focus segments: 1) Consumer durable lending 2)
Merchant lending (including personal loans, secured and unsecured)
3) MSME lending (working capital and small-ticket business loans).
JFS will leverage distribution strength (physical and digital such as
MyJio app, etc.) of telecom and retail ventures of RIL to scale these
segments. Its digital payments offering (payments aggregator) is
likely to be a hook for small merchant acquisition, in our view. In
asset management, JFS has formed JV with Blackrock to offer low-
cost investment solutions (passive funds). Besides these, JFS also
Viral Shah | viral.shah@iiflcap.com Rikin Shah | rikin.shah@iiflcap.com
91 22 4646 4781 91 22 4646 4668
Update
houses Jio Payments bank (JV) and account aggregator businesses.
We note that payments bank lack an independent DD business case,
MMM YYYY
given the regulatory restrictions limiting the scope of permissible
businesses. Whereas, the business model for account aggregator is
yet to evolve (no data advantage, given the regulatory restriction on
AAs with regard to customer data).
Will JFS disrupt the lending landscape with its $14bn net worth?
JFS’s lendable net worth is likely to be ~19% of its reported consol.
net worth of Rs1.15trn, once the cost of 6.1% RIL stake is deducted
(in excess of 10% of adj. net worth (Fig. 6). A meaningful portion of
this is likely to be used to seed non-lending financial businesses. Of
course, the monetisation of this stake would be lendable net worth
accretive.
Initially, we expect JFS to target consumer durable loans, unsecured
personal and small-ticket merchant loans by leveraging Reliance
Retail and Jio Telecom’s physical and digital distribution channels. We
expect the scale-up to be gradual (save for any acquisitions) as it
builds out physical and collections infra (currently JFS has only 29
employees) - peers have 800-4K branches and 4-66K employees (Fig.
11). FinTech lenders that typically lack physical and collections infra
have AQ challenges, which are reflected not only in higher
delinquencies but also materially lower roll-back rates. (Fig. 12, 13).
Over the medium term, we expect JFS to add larger ticket size and
secured consumer, merchant and MSME loans. These segments have
a market size of Rs17trn, out of the Rs71trn of total retail and SME
lending (Fig. 8-10).
JFS’s entry in these segments may not be disruptive on growth for
other lenders, given the relative underpenetration of retail lending in
India (Fig. 18-21). But, it can dilute the high profitability of these
segments if it competes on pricing. Further, we believe that
competition through any form of predatory offerings is unlikely, given
that: 1) Its funding cost is not materially different from BAF’s (6.7%
for CPs, like for like) and is in fact ~200bps higher than top Private
banks / SBI. 2) Highly regulated nature of lending business.
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91 22 4646 4648
 India - Banking & Fin

Further, we do not expect mortgages to be JFS’s focus in the Figure 1: JFS derives the bulk of its valuation from 6.1% RIL stake
medium term, as: 1) Banks have inherent competitive advantage in Jio FS illustrative pro-forma valuation Rs bn US$ bn
the prime Home Loan segment. 2) Affordable home loans require (A) Consol net worth of JFS 1,141 13.9
completely different infra, comprising the sales, underwriting, (B) Cost of 6.1% stake in RIL 948 11.6
technical and collections team. Indeed, loan policy of JFS’s NBFC (C) Consol networth of JFS excl cost of invst in associates
193 2.4
subsidiary has capped retail loan tenures at 5 years. through which JFS is beneficiary of 6.1% stake in RIL [A-B]
P/B multiple (x) 5.0
How does the leadership team look like? Value of JIO FS excl 6.1% stake in RIL 967 11.8
JFS has put together a highly experienced leadership team, starting Value of 6.1% stake in RIL at current market cap of Rs17.3tn 1,055 12.9
from K.V. Kamath as Non-executive Chairman (erstwhile MD & CEO Hold co discount (%) 20% (211) (2.6)
of ICICI bank and Infosys and also the first president of NDB). Hitesh Estimated market cap of Jio FS 1,811 22.1
Sethia has been nominated as MD & CEO. He has two decades of Number of shares (mn) 6,353
experience in Financial Services and has handled leadership roles Estimated share price of Jio FS (Rs / share) 285
across various departments at ICICI bank. The Board would also have Source: Company, IIFL Research
Isha Ambani and Anshuman Thakur as
Non-executive Directors (Fig. 22, 26). Figure 2: JFS valuation under various scenarios of core P/B multiple and holding
company discount on 6.1% RIL stake
How to think about valuations?
Holding company discount on market value of 6.1% RIL stake
JFS will be listing on 21st Aug, 2023. It derives the bulk of its valuation
285 0% 10% 20% 30% 40%
from 6.1% RIL stake that it owns with the company yet to commence
2.0 x 227 210 194 177 161
its lending business. However, given that the scale of resources being
3.0 x 257 241 224 208 191
committed and a credible leadership team, market will also ascribe
4.0 x 288 271 255 238 221
value to its future potential. Illustratively, ascribing 5x multiple to P/B on adj.
5.0 x 318 302 285 269 252
Rs193bn of consol. net worth (excl. cost basis for 6.1% RIL stake) networth
6.0 x 349 332 316 299 282
and market value for 6.1% RIL stake after 20% holding company
7.0 x 379 363 346 329 313
discount, indicates equity value of Rs285/share (market cap of
8.0 x 410 393 376 360 343
$22bn). Our scenario analysis indicates JFS valuation of
Source: Company, IIFL Research
Rs200-320/share ($15-25bn).

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 India - Banking & Fin

Figure 3: NBFCs are trading at 1.5x to 7.5x trailing P/B currently

Source: Bloomberg Professional, IIFL Research

vi ral . sh ah @i i fl cap. c om 3

What businesses is JFS going to enter?
Figure 4: JFS organisation structure
Source: Company, IIFL Research
Figure 5: Jio Financial Services intends to offer products encompassing lending, investing, payments and insurance
Company
Lending business
Reliance Retail Finance
Consumer lending NBFC targeting
three segments, with distribution
primarily through customer-facing
app
Non-lending businesses
AMC JV with Blackrock
Reliance Retail Insurance Broking
Reliance Payments Solutions
Jio Payments Bank
Jio Information Aggregator
Source: Company, IIFL Research
India - Banking & Fin
Segments Description Market Size (Rs trn)
- Consumer durable:
- Initially Jio FS will offer consumer durable financing at retail stores
Consumer lending Rs0.8trn
- Over medium term, it will add some secured loans to consumers.
- PL: Rs10.5trn
Providing financing options digitally like trade credit, personal loans, store
Merchant lending improvement loans and unsecured business loans for merchants in grocery, digital, Micro and small
fashion and pharma formats. MSME loans: Rs15trn
Offering working capital funding to suppliers and distributors and small-ticket business (FY22)
MSME
loans to smaller merchants.
Offering cost effective and innovate investment solutions.
Insurance broking for retail customers, SMEs and corporates.
Payments aggregator offering for enterprise, retail and delivery merchants.
Payments Bank JV with SBI.
Account Aggregator
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 India - Banking & Fin

Will JFS disrupt lending landscape with its Figure 8: Indian retail and SME loans have Rs71trn market size and constitute ~42% of
total Banking and NBFC system credit
Rs1.1trn net worth?
Figure 6: JFS’s lendable net worth would be ~19% of its consol. net worth of Rs1.15trn
Jio FS pro-forma lendable net worth Rsbn US$ bn
(A) Consol. net worth of JFS 1,141 13.9
(B) Of which, net worth accretion on consolidation 901 11.0
(C) Adj. consol. net worth of JFS 241 2.9
(D) Cost of 6.1% stake in RIL 948 11.6
(E) Allowable investment for net worth: [10% of C] 24 0.3
(F) Adj. consol. net worth of JFS for Tier 1: [A-D+E] 218 2.7
Source: Company, IIFL Research

Figure 7: Net worth comparison across Banks and NBFCs

Source: RBI, IIFL Research

Figure 9: Housing is the largest Retail lending segment, constituting 40% of total retail +
SME lending in India

Note: HDFCB is pro-forma merged; Source: Company, IIFL Research

Source: RBI, IIFL Research

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 India - Banking & Fin

Figure 10: JFS’s target focus segments have a market size of Rs17trn Figure 12:…which is critical for portfolio AQ

Source: Experian; Based on sample of data for FY22 personal loans

Source: Crisil, TransUnion CIBIL, IIFL Research

Figure 13: BNPL borrowers, who are typically FinTech customers, have 75-90% higher
Figure 11: JFS scale-up likely to be gradual, as it sets up physical and collections infra… delinquencies

Source: Company, IIFL Research; Note: 1) FY23 numbers for HDFC Ltd and employees of LTFH; 2) Source: TransUnion CIBIL
number of locations for BAF, 3) EEs refers to number of employees

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 India - Banking & Fin

JFS financials Figure 16: Cost of 6.1% RIL stake constitutes 82% of consol. assets
Investments (Mar’23) Rsbn
Figure 14: JFS consol. balance sheet JVs / associates (at cost)
Balance Sheet (Rsbn) FY23 Reliance Services & Holdings Limited (Equity and Pref.) 331
Cash and Cash Equivalents 60 Corpus of Petroleum Trust 617
Investments 1,081 Jio Payment Bank 1
Loans 0 Settlors Contribution in Trust 1
PPE 2 At FVTOCI
Other Assets 5 Digital Fibre Infrastructure Trust 29
Total Assets 1,149 Others 1
Share capital 64 At FV through P&L
Other Equity 1,078 Equity shares, CPs, CDs, bonds, MFs, treasuries 102
Total Equity 1,141 Total investments 1,081
Borrowings 7 Source: Company, IIFL Research
Other Liabilities 1
Figure 17: 79% of consol. net worth is on account of adjusted on consolidation
Total Liability 1,149
Equity (Mar’23) Rsbn
Source: Company, IIFL Research
Share capital 64
Figure 15: JFS consol. P&L Other equity
Profit and Loss Statement (Rsbn) FY23 Securities premium 296
Interest Income 0.4 Retained earnings 101
Other Income 0.1 OCI 671
Total Revenue 0.4 Others 10
Opex 0.1 Total equity 1,141
PPOP 0.4 Of which
Add: Revenue of ECL & Adj. on consolidation 901
0.1
contingent provision on standard assets Others 241
PBT 0.5 Source: Company, IIFL Research
Tax 0.2
PAT 0.3
Source: Company, IIFL Research

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 India - Banking & Fin

Retail lending has room to grow, given the relative Figure 20: $270bn TAM for residential property backed small business lending

underpenetration Estimated HHs in

Ests share of Self
Ests # of self
employed HHs with
Employed (Non Agri)
India self occupied
in total HHs
Figure 18: Globally, India’s HH debt-to-GDP is amongst the lowest residential property

271 million 56 million 46 million

Addressable market
Estimated Pucca
for residential
House (Rural &
ATS (assumed ) property backed
Urban) + Semi Pucca
small business
Houses (Rural)
lending

44 million Rs 5,00,000 Rs 22 trillion

Source: NSSO 73rd and 76th, CRISIL, IIFL Research

Figure 21: There is $250bn credit gap in MSME lending

Source: BIS, IIFL Research

Figure 19: At 7% of PFCE, Personal Loan penetration in India is low

Source: IFC, CIBIL, IIFL Research

Source: Euromonitor, CRIF Highmark, IIFL Research

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 India - Banking & Fin

How does the leadership team look like?

Figure 22: JFS Management Structure

Source: Company, IIFL Research

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 India - Banking & Fin

How to think about valuations? Figure 25: NBFCs are trading at 1.5x to 7.5x trailing P/B currently

Figure 23: JFS derives bulk of its valuation from 6.1% RIL stake
Jio FS indicative pro-forma valuation Rs bn US$ bn
(A) Consol net worth of JFS 1,141 13.9
(B) Cost of 6.1% stake in RIL 948 11.6
(C) Consol networth of JFS excl cost of invst in associates
193 2.4
through which JFS is beneficiary of 6.1% stake in RIL [A-B]
P/B multiple (x) 5.0
Value of JIO FS excl 6.1% stake in RIL 967 11.8
Value of 6.1% stake in RIL at current market cap of Rs17.3tn 1,055 12.9
Hold co discount (%) 20% (211) (2.6)
Estimated market cap of Jio FS 1,811 22.1
Number of shares (mn) 6,353
Estimated share price of Jio FS (Rs / share) 285 Source: Bloomberg Professional, IIFL Research
Source: Company, IIFL Research

Figure 24: JFS valuations under various scenarios of core P/B multiple and holding
company discount on 6.1% RIL stake
Holding company discount on market value of 6.1% RIL stake
285 0% 10% 20% 30% 40%
2.0 x 227 210 194 177 161
3.0 x 257 241 224 208 191
4.0 x 288 271 255 238 221
P/B on adj.
5.0 x 318 302 285 269 252
networth
6.0 x 349 332 316 299 282
7.0 x 379 363 346 329 313
8.0 x 410 393 376 360 343
Source: Company, IIFL Research

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 India - Banking & Fin

BOD and key management profile

Figure 26: Board of Directors
Board of Directors
Mr. K. V. Kamath is a Mechanical Engineer and completed his PG from the IIM Ahmedabad. He retired as MD and CEO of ICICI Bank in 2009
Independent Director and
K. V. Kamath and continued as the Chairman until 2015. Mr. Kamath has served as Chairman of Infosys. In 2015, he was appointed as the first President of
Non-Executive Chairman
the New Development Bank set up by the BRICS countries from where he retired in 2020. He is currently the Chairman of NaBFID.
Mr. Rajiv Mehrishi holds B.A. (Honours) History and M.A. (History) from St. Stephen’s College, University of Delhi. He is also an MBA from the
Rajiv Mehrishi Independent Director University of Strathclyde, Glasgow, United Kingdom. He has an extensive experience of over four decades in various fields including corporate
law, audit and corporate governance.
Mr. Sunil Mehta holds a Master’s degree in Agronomy and a MBA (finance) from R.A. Poddar Institute of Management. He is a certified
Sunil Mehta Independent Director
associate of the Indian Institute of Bankers. He is currently Chief Executive of Indian Banks’ Association.
Bimal Manu Mr. Bimal Manu Tanna is a CA, having over 35yr varied experience in practice and in industry. He has been part of a highly reputed domestic
Independent Director
Tanna as well as a professional services MNC firm and served clients primarily across tax, due diligence and valuations.
Sethuraman Non- Independent Non- Mr. Sethuraman Kandasamy is a Chartered Accountant and Company Secretary with over 40 years of experience in the field of corporate and
Kandasamy Executive Director securities laws. Previously, he held the position of Group Company Secretary and Chief Compliance Officer of Reliance Industries Limited.
Jagannatha
Non- Independent Non- Mr. Jagannatha Kumar Venkata Gollapalli holds B.tech and an MBA from the IIM, Bangalore. He has over 30 years of experience in diverse
Kumar Venkata
Executive Director fields such as Banking, Finance, Venture Investments, M&A, Public Policy and Development sector.
Gollapalli
Mrs. Jayashri Rajesh holds a Bachelor’s degree in Commerce from Madras University and is member of the Institute of Cost and Management
Non- Independent Non-
Jayashri Rajesh Accountants of India. She has over 30 years of experience in the field of Costing and Cost Management. She has been associated with Reliance
Executive Director
Industries Limited since 1992 and is currently holds the Vice President.
Proposed Directors in BOD
Proposed Non- Anshuman Thakur holds a Bachelor’s degree in Economics and MBA from IIM, Ahmedabad. He has 24yr experience in Corporate Strategy and
Anshuman Thakur Independent Non- Investment Banking and has worked across diverse industries in firms such as Morgan Stanley, Rothschild, Arthur Andersen and EY. He joined
Executive Director the Reliance Group in 2014 and has been closely involved with the Jio and retail businesses.
Proposed Non- Ms. Isha Mukesh Ambani has completed her graduation from Yale University and holds an MBA from Stanford University. Presently, she is a
Isha Mukesh
Independent Non- part of the executive leadership team at Reliance Retail where she is driving expansion into new categories, geographies and formats and is
Ambani
Executive Director focused on enhancing the overall customer experience.
Source: Company, IIFL Research

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 India - Banking & Fin

Figure 27: Key Management Personnel

Key Management Personnel
Mr. Hitesh Sethia is a CA and has completed the Advanced Management Program from Harvard Business School. He is a Financial services executive
Hitesh President and
with over two decades of experience across Europe, Asia (India and Greater China) and North America. He has spent most of his career at ICICI Bank
Kumar Chief Executive
Limited, gaining functional experience and handling leadership roles across various departments such as credit, retail banking, corporate banking and
Sethia Officer
transaction banking; coupled with understanding of technology applications in Financial services.
Charanjit Mr. Charanjit Attra is a CA and a Certified Public Accountant from Denver, Colorado. Prior to this role, he was the Chief Financial Officer of State Bank
Group Chief
Surindra of India, wherein his portfolio included accounting, capital planning & investor relations. Before this, , he was a partner with Ernst and Young
Operating Officer
Singh Attra Associates.
Manish Group Chief
Mr. Manish Singh holds a Master’s degree in Human Resources and Organisational Development from Delhi School of Economics. Prior to this role, he
Kumar Human
was working with the Abu Dhabi Department of Economic Development, as CHRO, to establish a new financial institution in UAE.
Singh Resources Officer
Group Company
Mrs Mohana V is a Company Secretary and holds a Bachelor’s degree in Commerce and a Bachelor’s degree in Law from Bangalore University. He has
Secretary and
Mohana V over 27yr experience in corporate legislations, compliances and corporate due diligence. She has been associated with Reliance Industries since 2016.
Compliance
Prior to joining Reliance, she has worked with Biocon Limited, GMR Energy Limited and GMR Infrastructure Limited.
Officer
Abhishek Group CFO
Mr. Abhishek Pathak is a CA and also holds MBA from Babson College, Boston, USA. He was part of the setup team for the New Development Bank.
Haridas Banking and
Prior to his role, he worked with ICICI Group in different functional departments.
Pathak Rural Business
Source: Company, IIFL Research

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 India - Banking & Fin

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 India - Banking & Fin

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A graph of daily closing prices of securities is available at http://www.nseindia.com/ChartApp/install/charts/mainpage.jsp, www.bseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes.
(Choose a company from the list on the browser and select the “three years” period in the price chart).

Name, Qualification and Certification of Research Analyst: Viral Shah(CA, CFA), Rikin Shah(CA, CFA), Jai Daxini(Chartered Accountant )

IIFL Securities Limited (Formerly ‘India Infoline Limited’), CIN No.: L99999MH1996PLC132983, Corporate Office – IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel, Mumbai – 400013 Tel: (91-
22) 4249 9000 .Fax: (91-22) 40609049, Regd. Office – IIFL House, Sun Infotech Park, Road No. 16V, Plot No. B-23, MIDC, Thane Industrial Area, Wagle Estate, Thane – 400604 Tel: (91-22) 25806650. Fax: (91-22)
25806654 E-mail: mail@indiainfoline.com Website: www.indiainfoline.com, Refer www.indiainfoline.com for detail of Associates.
Stock Broker SEBI Regn.: INZ000164132, PMS SEBI Regn. No. INP000002213, IA SEBI Regn. No. INA000000623, SEBI RA Regn.:- INH000000248

Key to our recommendation structure

BUY - Stock expected to give a return 10%+ more than average return on a debt instrument over a 1-year horizon.

SELL - Stock expected to give a return 10%+ below the average return on a debt instrument over a 1-year horizon.

Add - Stock expected to give a return 0-10% over the average return on a debt instrument over a 1-year horizon.

Reduce - Stock expected to give a return 0-10% below the average return on a debt instrument over a 1-year horizon.

Distribution of Ratings: Out of 270 stocks rated in the IIFL coverage universe, 138 have BUY ratings, 4 have SELL ratings, 84 have ADD ratings, 2 have NR ratings and 41 have REDUCE ratings

Price Target: Unless otherwise stated in the text of this report, target prices in this report are based on either a discounted cash flow valuation or comparison of valuation ratios with companies seen by the analyst as
comparable or a combination of the two methods. The result of this fundamental valuation is adjusted to reflect the analyst’s views on the likely course of investor sentiment. Whichever valuation method is used there
is a significant risk that the target price will not be achieved within the expected timeframe. Risk factors include unforeseen changes in competitive pressures or in the level of demand for the company’s products. Such
demand variations may result from changes in technology, in the overall level of economic activity or, in some cases, in fashion. Valuations may also be affected by changes in taxation, in exchange rates and, in certain
industries, in regulations. Investment in overseas markets and instruments such as ADRs can result in increased risk from factors such as exchange rates, exchange controls, taxation, and political and social conditions.
This discussion of valuation methods and risk factors is not comprehensive – further information is available upon request.

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