Jio Financial’s discovered price exceeds estimates

The National Stock Exchange scheduled the special pre-open session between 9 and 10 am to determine the price for Jio Financial in the capital market segment.

The move followed Reliance Industries Ltd’s (RIL) decision to spin off its financial services business, Reliance Strategic Investments Ltd, and change its name to Jio Financial Services.

The price discovery process was based on the difference between the closing price of RIL shares, which was at ₹2,580 at the end of the pre-opening session, and Wednesday’s closing price of ₹2,841.85.

Consequently, Jio Financial Services was included in various indices, including the Nifty, at a price of ₹261.85. This price will remain constant till the date of the company’s listing is declared.

RIL shareholders are being issued Jio Financial Services shares at a ratio of 1:1, meaning shareholders will get one equity share of Jio Financial for each held in RIL on the record date.

According to V.K. Vijayakumar, chief investment strategist at Geojit Financial Services, the market-discovered price of Jio Financial Services was much higher than most brokerage estimates. “This price reflects the market’s assessment of the company’s potential,” he said.

The wide reach of Jio Financial Services through RIL’s other business segments like Reliance Retail has the potential to grow the company quickly for many years to come, and the market is discounting this potential, he added.

The group’s significant presence in the retail and telecom sectors not only drives its customer base but also fosters vendor partnerships. Analysts said Jio Financial Services’ first target may lie in consumer lending, especially for the electronics sector, and merchant financing.

Jefferies India Pvt. Ltd analysts said Jio Financial Services’ key advantage lies in its ability to benefit from low funding costs and better access, thanks to the group’s high credit rating and the ownership of a 6.1% stake in RIL. Analysts, however, are awaiting more clarity on valuations. They expect RIL’s annual general meeting to provide a more detailed and granular roadmap for Jio Financial Services’ strategic direction.

To estimate the valuations of Jio Financial Services, analysts considered the 6.1% treasury stake in RIL to be owned by Jio Financial. JPMorgan analysts pegged the implied value of the company at ₹189 per share, based solely on the treasury shares of RIL.

Nuvama Institutional Equities analysts valued the treasury shares at ₹168 apiece, based on RIL’s closing price on 14 July, and said that the demerger will have minimal impact on RIL’s stock, and they anticipate a potential upside of 3-5%.

In a press release, RIL provided the formula for determining the cost of acquiring equity shares of RIL and Reliance Strategic Investments, which was renamed Jio Financial Services. According to the formula, the demerger cost of acquiring RIL’s equity shares is apportioned in the ratio of 4.68 for Reliance Strategic Investments and 95.32 for RIL.

Meanwhile, shares of RIL gained 1.67% over their opening price on Thursday to close at `2,623 levels on the NSE.

Analysts believe that the prospects of RIL remain firm, aided by strong growth prospects of all of its business segments, such as oil-to-chemicals, retail and telecom.

“As in the near term, these segments will continue contributing to growth. The investments in potential new energy businesses as those in green hydrogen will drive longer-term growth prospects of the company,” said Devarsh Vakil, deputy head of retail research, HDFC Securities.

Analysts at Morgan Stanley Research had said in a recent report that they expect RIL’s earnings to grow at a 17% compound annual growth rate over the next two years, with a recovery in chemicals, telecom tariff hikes, monetization of retail investments and a rise in gas production.

Updated: 21 Jul 2023, 01:04 AM IST