Jio Financial Services, the demerged financial services unit of Reliance Industries, made a dismal debut on the bourses on Monday to hit the lower circuit, led by selling from index funds.

The company’s shares listed at ₹265 apiece on the BSE and ₹262 apiece on the NSE, against the discovered price of ₹261.85. It subsequently came under selling pressure and slid 5 per cent to hit the lower circuit. An estimated 7.82 crore shares changed hands at both exchanges on Monday.

Selling pressure

The stock will continue to have a 5 per cent circuit filter for the next 10 trading days. The Nifty 50 and Sensex will exclude JFS on T+3 trading day, which means the stock will no longer be part of these indices from Thursday, provided the stock is not trading at circuits. This could keep the stock under selling pressure from index funds, which could offload shares worth $465 million ahead of its exit from these indices. In case, during the first two days of the three days, the stock hits the price band on both days, then the exclusion date will be deferred by another three days.

Mahaveer Kaswa, Senior Vice President, Research (Passive Funds), · Motilal Oswal AMC, said as announced by Index providers, the Sensex and Nifty 50 indices have included Jio Financial Services, and it is an excellent way to treat the demerger. It will be dropped from all relevant indices on the third day of listing if it satisfies certain conditions.

Given the size of Jio Financial Services, it may potentially be included in upcoming scheduled index rebalancing if it complies with stock inclusion criteria, he added.

Passive index mutual funds may have to offload about ₹3,800 crore shares of Jio Financial Services at a valuation of ₹262 a piece if it does not figure in the Nifty after listing on the exchange.

At ₹262 per share, Nifty 50 index passive trackers could sell about 90 million shares, which is equivalent to ₹2,370 crore. Alongside Sensex index trackers, they could sell 55 million shares worth ₹1,440 crore. This is assuming weightages of less than 1 per cent in the Nifty and about 1 per cent in the Sensex, Nuvama Alternative and Quantitative Research report said.

“The shares are still trading at a price that is above the ₹179-224 value that some analysts had earlier ascribed to the company, although some positive developments have materialised subsequently. The price to book value is currently on the higher side when compared to a lot of existing NBFCs and banks, but that reflects the potential that investors see in it to disrupt the fintech space,” said Deepak Jasani, head of retail research at HDFC Securities.

Jasani added that some of the “non-funds” that sold KFS shares on Monday could look to re-enter at lower levels after Wednesday.

The net worth of JFS as of March 2022 was ₹280 billion, including ₹170 billion paid for the treasury share of RIL. The core net worth is ₹110 billion. At the discovered price, excluding the current value of investments (6.1 per cent stake in RIL) worth ₹1 trillion, analysts value the core business at about 6x trailing book value.

“We expect such euphoric valuations to hold for a while amid expectations of robust organic growth as well as probable opportunities for inorganic growth available in the financial domain,” said a note by Incred Equities.

It said that JFS will be up against formidable players, including large banks, NBFCs, insurance companies, and mutual funds, which are well equipped with modern technology, efficient manpower, and a well-spread presence. Creating a monopoly in any of the lending segments would be difficult as the space is well regulated by the RBI, the note observed.

Digital-first

Jio Financial Services chairman KV Kamath said on Monday that the company would aim to optimise digital opportunities and be a digital-first institution.

In the consumer finance space, for instance, JFS’ initial focus may be on consumer durable loans through the Reliance Digital network. “We expect JFS to offer digital loans to select cohorts of Jio’s customers as well. The unsecured or personal loan business takes time to build up due to low tickets and shorter durations; customer behaviour needs to be tracked over time to increase risk appetite,” said a note by Kotak Institutional Equities.

JFS aims to provide a range of financial services like lending, payment services, payment banking, insurance broking, and asset management. The target customers are unserved or underserved individuals and small-sized businesses in urban, semi-urban, and rural India. The company holds a 6.1% stake in Reliance Industries through a subsidiary.