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July 17, 2023

*Reliance Industries' financial services moment*
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?
*Metals & Mining Sector Newss / Updates*
*JSW Steel mulls bidding 20% stake in Canada's Teck coal unit: Report*
According to the report, JSW has expressed preliminary interest and is also in discussions with banks over potential financing for the acquisition that may total about $2 billion…..Though the deliberations are at an early stage, details such as price and timing could change.
India’s leading steel producer JSW Steel Ltd is mulling a bid for as much as a 20 percent stake in Canada's Teck Resources Ltd.’s steelmaking coal business, reported Bloomberg on 15 July citing sources.
In the meantime, Canada's largest diversified mining company Teck Resources Limited had planned to carve out its coal business. However, was forced back to the drawing board following canceling a shareholder vote on a spinoff in late April due to lack of support.
Rival Glencore Plc subsequently proposed buying the unit for cash, which Teck confirmed saying it was engaging with Glencore on the preliminary, nonbinding proposal, among others.
Meanwhile, Teck rejected Glencore’s unsolicited $23 billion takeover bid and said its offer remains on the table.
*JSW Q1 FY2023-24 Report:*
JSW Steel posted an 11 per cent year-on-year growth in consolidated steel production at 6.43 MT during the first quarter of the financial year. It had produced 5.77 million tonnes (MT) steel during the April-June period of the preceding 2021-22 fiscal, JSW Steel said in a statement.
JSW Ispat also reported its production volume, which stood at 1.84 lakh tonnes with a growth of 74 per cent year-on-year in the June quarter. The volume also rose one per cent on a quarter-on-quarter basis.
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*WHO WANTS THE PRECIOUS MINE?*
India Inc is seeking incentives for mining and processing the 30 critical minerals that the Centre has identified as crucial for economic growth and national security
Lithium is the new gold. This soft, silvery white metal is essential for a range of products — from batteries of electric vehicles, mobile phones and laptops to hydrogen fuel storage, air conditioning systems and pharmaceuticals. Even though a vast array of industries hinges on this single metal, India does not produce even a kilogram of it. Recently, India announced the discovery of 5. 9 million tonnes of lithium reserves in Jammu and Kashmir and the government is contemplating amending laws to pave the way for private miners to dig it up. But that may take a while.
For now, India imports lithium, and it relies mainly on China and Hong Kong. China accounted for 73% of India’s imports of lithium-ion — which is used in batteries — in 2020-21. Add Hong Kong and India’s import reliance on them shot up to a staggering 96%.
Besides lithium, there are several critical minerals such as cobalt, nickel, vanadium, niobium, germanium, rhenium, tantalum and strontium, which India imports entirely. Then there are others such as copper, gallium, graphite, phosphorus, potash, tin, titanium and tungsten, which carry high economic significance as well as supply risks.
All these metals have figured on the Government of India’s recent list of 30 critical minerals, which are instrumental to the country’s economic growth and national security. India Inc has applauded the move but wants a definitive policy that lays down guidelines for private engagement and which incentivises it to mine and process them.
Demand for some of these metals is set to zoom and even a small disruption in their supply chains will cripple industries such as high-tech electronics, telecommunications, transport and defence. According to industry estimates, the demand for lithium and cobalt, for example, may grow by 42 and 25 times respectively, between 2020 and 2040.
Tarun Mehta, CEO of Ather Energy, says the government has taken the first step towards de-risking supply chains and it should incentivise industries to mine and refine the metals. “Bringing parts of the value chain to the country will make EV batteries cheaper and help develop EV adoption across the country,” says Mehta.
@CNBCTV18Live
@AngelOne
is now prohibited from adding any new Authorized Persons (sub-brokers) for 6 months and to face inspection of operations of all APs.
Angel has the highest number of APs (21,000) among brokers
Wire at it’s best. In their political objectives, they are harming India’s interest. See this article, mischievously mixing data. India maintained it’s CY22 FDI (which is almost 2X in 10 year period) when World/OECD- FDI declined by 30-35%. There may be slow down in 2023 FDI, when entire world is collapsing in new capex/investment. Instead of lauding great efforts by Indian administration to stem this rout, their articles are as usual critical.
Stocks to watch
Alphageo (India) has received award of contract from Oil and Natural Gas Corporation (ONGC), Dehradun of Rs 39.33 crore
Avenue Supermarts (Dmart) has reported 2.46% rise in its consolidated net profit at Rs 658.71 crore for the quarter ended June 30, 2023
Hindustan Aeronautics has signed an agreement with Safran Helicopter Engines SAS for setting up the joint venture (JV)
Inflame Appliances has received largest orders for Chimneys across different SKUs totaling more than 36,000 chimneys from a single customer
Just Dial has reported net profit of Rs 83.40 crore for the quarter under review as against net loss of Rs 48.36 crore for the same quarter in the previous year
DMR Hydroengineering & Infrastructures appointed as LIE for Small Hydro Project in Karnataka
Surana Telecom & Power has entered into a Slump Sale Agreement with M/S SML Renewable, for selling of its Wind Energy Business Undertaking
Vikas Ecotech has bagged fresh orders worth over Rs 20 crore for its Specialty Polymer Compounds Division
Rajapalayam Mills has entered into the Share Subscription and Purchase Agreement (SSPA) for the purpose of sale and transfer of 12,14,51,338 equity shares in Lynks Logistics
Mahindra & Mahindra (M&M) has signed a memorandum of understanding (MoU) with NXP Semiconductors for embedded applications
Avenue Supermarts, Rallis India, Star Housing Finance, Vakrangee, Central Bank Of India, CRISIL, HDFC Bank, Tata Elxsi etc to see some action on July 17, 2023
*Jefferies on Avenue Supermart*
Hold Rating
Target Rs 3,700
EBITDA Was Slightly Ahead Of Modest Estimates, But A Miss On Consensus
General Merchandise & Apparel Mix Remained Muted Driving Margin Decline
Saw Sequential Improvement As General Merchandise Mix Is Close To Pre-COVID Levels
EBITDA Grew 3% YoY Due To YoY Margin Pressure
*UBS on DMART*
Sell, TP Rs 3700
Slow pick up in discretionary
Weak product mix continues to impact gross margin
Sales/sqft CAGR (over last 4-years) remains -ve
Management highlighted that GM & A mix is recovering and moving towards pre-pandemic levels
*MS on Avenue Supermart*
Equal-weight Rating
Target Rs 3,786
Top-line Growth Moderated & EBITDA Margin Below Estimates
Lower Demand For Better Margin GMA Categories Remains Key Challenge
GMA Contribution Is Now Recovering And Trending Towards Pre-pandemic Levels
*Macquarie on DMART*
O-P, TP Rs 4450
1Q EBITDA broadly in line
DMart's comment of general merchandise sales share recovering towards pre-pandemic levels bolsters view of this weakness being more cyclical
Expect solid EPS growth
*Nomura on Bandhan Bank*
Buy Rating
Target Cut To Rs 270 From 325
PAT Beat Aided By Lower PCR, Cut Our FY24-26 EPS Est By 11-14%
Bow Value At 1.5x Jun-25 BVPS Vs 1.7x Earlier, Multiple Cut On Lower Sustainable RoE
*GS on Bandhan Bank*
Buy, TP Rs 302
1Q mixed bag with miss on PPOP, new slippages & loan growth
Even though collection efficiency in its core markets improved significantly
Significant re-rating hinges on pick up in loan growth & improvements in PPOP-ROAs in 2H
*JPM on Bandhan Bank*
OW, TP Cut to Rs 320
1Q PAT at Rs7.2bn (-19% y/y; ROE: 14.5%) was below JPMe
Loan book down 6% q/q (+7% y/y) given seasonal weakness but target remains for a 20% growth for F24
Recovery of guarantee money in 2QFY24 will be a near-term stk catalyst
*Jefferies on Bandhan BK*
Buy Rating
Target Cut To Rs 280
Profit Slightly Missed Forecast Due To Higher Opex & Lower Other Income
Core Growth Trend Was Expectedly Weaker With Loan Growth Of 8%, NII Growth Of -1%
Expect Loan & NII Growth To Improve From Q2 As Disbursements Pick-up & Base Goes Down
Slippages Incl One-time Addition Due To Change In Norms, But Coverage Is Sufficient
*CLSA on Bandhan Bank*
Buy Rating
Target Cut To Rs 290
Q1 Was Muted, Especially MFI Portfolio Which Experienced a Contraction In AUM
The increase In MFI NPAs Was Due To Seasonal Weakness
Bank’s Non-MFI Book Was Stable QoQ
With Collections Holding Up At +98%, Expect Gradual Improvement In Asset Quality
Factoring Q1 Weakness, Cut Loan Growth Est, Revise FY24-26 Earnings Down By 3%-6%
*Citi on JSW Energy*
Sell Rating
Target Rs 222
Company Reported Weak 1QFY24, Valuations Are Expensive
Some Lost EBITDA Would Be Recovered During The Year Given the Regulated Nature Of the Projects
Mytrah Acquisition Was PAT Positive In Q1FY24
Co Continues To Execute Well & Balance sheet Remains Healthy
Valuation At 12x Forward EV/EBITDA Is Expensive
*Jefferies on HDFC Bank*
Resume Buy Rating
Target Rs 2,100
Bank Now Among Global Large Banks With Best In Class Growth & Profitability
Merger Broadens Lending & Cross-sell Avenues Especially In Mortgages, Insurance, MFs
Mobilization Of Deposits Should Drive Success & Early Success With Branch Expansion
Forecast Profit CAGR Of 17% Over FY23-26, RoA Of 1.9% & RoE Of 16% In FY25
Risk Is From Spike In Rates & Lower PSLs

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