JioFinance - Multibagger Finance Stock:
Jio Financial Services Ltd was listed at Rs 261 per share on 21st August and experienced a correction of around 23% in the following 5 days. Since then, it has already gone up by 21% in the subsequent 6 days.
Investor sentiments have turned positive for this stock, and it is already valued as the second-largest Non-Banking Finance Corporation in India.
Could Jio Finance be the next big Multibagger Finance stock?
Where does the competitive advantage of Jio Finance lie?
Simply put, it can achieve results (reach you) by spending only 1/100th of what its rivals require.
Let’s delve deeper into Jio Finance by examining Reliance’s typical business-building approach.
Reliance Strategy Business Model:
1. Form Strategic Partnerships and Procure Capital:
- In August 2022, Reliance Jiomart partnered with Meta to offer grocery shopping on WhatsApp.
- A similar story is unfolding with Jio Financials as they partner with Black Rock, one of the largest global Asset Management companies.
2. Price Wars and Undercutting competition:
- This strategy was evident in the telecom sector where Jio became one of the largest telecom players by capturing market share from other competitors.
3. Eliminating Competition:
- Taking the same story of Jio in the telecom sector, they wiped out numerous players, leaving only large conglomerate players in the market.
4. Profitability Stage/ Price Increase:
- Jio in telecom began with free resources and low prices to attract customers. Once they secured enough market share, they aggressively raised prices.
Their strategy is also currently in play in Jio Cinema (Streaming Service) where they are in the price cutting stage, with plans to increase prices once they start dominating the markets.
Now given their strategies and previous business models, where will Jio Financial’s focus lie?
Key Verticals for Jio Financial Services:
1. Mutual Funds:
- Reliance’s strategy of cutting prices will help in this segment since people pay attention to the commissions that they pay. Hence if Jio Financials can offer low commissions they can start gaining market share relatively quickly.
- A similar story played out with Navi Mutual Funds where they grew their Asset Under Management (AUM) mainly by taking smaller commissions (expense ratio etc.).
2. Aggregator Platform:
- Aggregator Platforms normally works as an all-in-one service platform that hosts a bunch of functionalities (like PayTM).
- Jio Financial’s interest in aggregator platforms is backed by the announcement in 2016 by RBI which mentioned that NBFCs can become aggregator platforms.
3. Sell Insurance:
- Jio Financials can directly sell insurance to consumers through their aggregator platform.
4. Consumer Loans:
- Jio Financials will also start providing consumer loans to the public using their aggregator platform.
- Why would Jio Financials start working towards having their UPI business? Even companies like NAVI are taking steps towards the same. Why? This is simply because as these companies focus on building platforms, their goal will be to ensure that they can increase the Daily Average Users (DAU).
- Therefore, incorporating UPI into their platforms will significantly increase their DAU and, more specifically, boost their revenue from the other aforementioned verticals.
Will Jio Financials be Profitable?
To assess this, we we will consider 3 main segments:
1. Target Market:
- Jio Financials will target users that have higher discretionary income (ie: top 3-5% in India). With significant growth in the Indian economy this number could go up to the top 10% in India.
- It is important to note that this top 5-10% market would be the most profitable market, ie: it is better to target someone who earns 1 Cr instead of someone who earns 5 Lakhs. So their target market will help them raise their earnings tremendously.
2. Financialization of India:
- Incorporation of UPI, banking facilities, and discretionary income are all on the rise, showcasing positive growth trends.
- Therefore, they are competing in a growing industry as opposed to the story of Jio Telecom where they were in a stagnating/slower growth industry.
- Growth of the Indian Economy will most likely be fueled by a growth in Indian Finance and Banking Services, so this becomes a very lucrative industry to enter into.
3. High Return on Invested Capital (ROIC):
- ROIC can be illustrated with a simple example: Let’s say the ROIC of Jio is 5%. If we invest INR 100 in Jio, then in one year it will grow to 105.
- Typically, Financial Services businesses enjoy a higher ROIC business. For instance, for every INR 100 that Jio Financials invests in the company, they could potentially grow it to INR 115 – 120 due to their higher ROIC.
- Reliance’s journey began in the capital-intensive Oil industry, which yielded a low ROIC. They then transitioned to Telecom, characterized by a medium ROIC. Now, their entry into Financial Services promises a substantially higher ROIC.
Now that we have an idea of why and how Jio Financials could turn out to be profitable, we will look into which companies will Jio Financials start directly impacting?
Jio Financial’s Competitors:
For this discussion, let’s look into what constitutes an NBFC?
Jio Financials will most likely enter into the Consumer Lending, Aggregator Space and Asset Management space from the above model.
Lets create a heatmap on some of the prominent NBFC businesses:
1. Consumer Finance/ Durables:
- Bajaj Finance has a monopoly in the area of consumer durable and automobiles (mainly 2 wheelers).
- They already have a large distribution and risk management system. They also have a strong and proven business model which has grown with time.
- So it looks unlikely that Jio Financials will compete head on in this space.
2. Housing Finance:
- Mainly focused on giving home loans. Companies such as Aavas Financiers focus on this section.
- It also looks unlikely that Jio Financials will enter this area as their first choice.
4. Aggregator Platforms:
- Aggregator platforms are like a mass market product where you can sell loans, insurance, gold, mutual funds etc. This business is also fairly easier to scale up and so this becomes one very lucrative section that Jio Financials will mostly likely target.
- So therefore players like PayTM and Cred will likely face direct competition from Jio Financials.
4. Microfinance Industry:
- This industry is not profitable enough when compared to the other alternatives for Jio Financials to consider entering.
What other business can Jio Financials start considering?
- Since Reliance already has a crazy business empire of retail stores, digital services, electronics etc., they can easily give small consumer loans using their consumer data and their aggregator platform, and further push people to take consumer loans even through their physical stores.
- They can also consider entering the credit card business which is a high ROIC business in a fast growing industry.
Should you buy Jio Financials? If so, at what levels should you buy?
Points to note before buying Jio Financials as of September 4th, 2023:
1. Advantage of Index Rebalancing:
- Major Mututal Funds may need to sell Jio Financial Services as part of their portfolio rebalancing, which could potentially explain the 23% correction observed in Jio Financials during the initial days.
2. Price discovery of an IPO takes time:
- Even though Jio Finance is more of a demerger than an IPO, it will take sometime for the stock to go through its price discovery.
- So if you have a short term horizon, you can wait and watch before aggregating.
- If you are of a long term view of 2-3 years, and feel like you are getting it at a good valuation then you can start aggregating now.
- PS: Not a stock buying recommendation.
3. Conglomerate Risk:
- The Reliance Business Empire constitutes of a multitute of companies, significantly larger when compared to just the Jio Financials business.
- The concern, as observed in the Adani Group, is that problems within one company can ripple across other companies within the group.
- A similar challenge could arise where, despite Jio Financials generating substantial profits, these gains might not be fully reflected in its financial reports, as the capital could potentially be redirected or allocated to other entities within the Reliance Group.
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Jio Financials appears to be a fundamentally strong player, strategically positioned in a growing and highly lucrative industry. If the Reliance group is able to use its capital and distribution effectively while mitigating risks in an efficient manner, then Jio Financials could prove to be a successful multibagger venture for the Ambani Group.
Disclaimer: This is not a stock buying recommendation.
- Jio Finance is gaining attention as a potential multibagger in the Indian finance sector, thanks to its recent performance.
- Its success is rooted in Reliance’s proven strategies: forging strategic partnerships, aggressively undercutting competitors in price wars, and ultimately focusing on profitability.
- Jio Finance’s portfolio spans various financial services, including mutual funds, an aggregator platform, insurance sales, consumer loans, and the integration of UPI payments.
- Its primary target audience comprises India’s top earners, presenting significant growth opportunities, especially in the context of India’s flourishing economy.
- Jio Finance might pose a direct challenge to established players like PayTM and Cred in these domains.
- For prospective investors, several factors warrant consideration. These include the potential impact of index rebalancing on the stock’s performance, the time required for the market to establish its fair value, and the associated conglomerate risk due to its affiliation with the broader Reliance Group.
- In conclusion, Jio Finance seems to be strategically positioned in a lucrative industry, offering growth potential. However, investors should conduct thorough due diligence and factor in the risks before making investment decisions.
Disclaimer: This is not a stock buying recommendation.