What does demerger of the financial services biz mean for RIL shareholders?

The September quarter results of Reliance Industries sprung no major surprises for investors.

Billionaire Mukesh Ambani’s RIL posted flat growth in net profit of Rs 13,656 crore, while the consolidated Ebitda came in at Rs 34,663 crore.

That said, what captured investors’ fancy was the Board’s decision to demerge and list its financial services undertaking into Reliance Strategic Investment, or RSIL. The firm would be renamed as Jio Financial Services.

RSIL is currently a wholly-owned subsidiary of RIL and is a Reserve Bank of India-registered non-deposit taking systemically important NBFC.

Shareholders of RIL will receive one equity share of JFS for one fully paid-up equity share held in RIL.

The windfall Indian tax on transportation fuels, and weak refining and polymer margins have been hurting the conglomerate’s legacy petrochemicals and energy operations. 

This is, probably, why Ambani is spinning off Jio Financial Services — to double down on the consumer business and put some sizzle back in the stock.

G Chokkalingam, Founder and Chief Investment Officer at Equinomics Research says, RIL has had subdued financial performance. Weak exports of petrochem products affected earnings. RIL is known for value creation via organic and inorganic growth. It is well positioned to repeat the story. 

A successful fintech loans platform draws upon the data-network-activity. 

The digital trail people leave behind on e-commerce or social media sites can be used to bind them into a strong network, which can be harnessed to encourage borrowing activity. This loop is already in place for Reliance. 

Deven Choksey, Managing Director, KR Choksey Investment Managers says, the lending biz is done best via banks/NBFCs. RIL caters to 10 million Kirana stores; 16,000 own stores. RIL also has access to Merchant Credit for all their suppliers. Thus, two models emerge for Reliance – Customer lending and Merchant lending. Bajaj Finance is lending credit worth Rs 2.2 trillion. RIL has the potential to surpass this level.

The financial services’ segment reported Ebitda of Rs 89 crore in Q2, with segment assets worth Rs 95,410 crore and liabilities of only Rs 30 crore. 

Global consultancy firm Bain & Company expects India’s smartphone users to grow to 1.1 billion by FY26, up from about 750 million today.

It also expects more than 850 million internet users in FY26, up from about 650 million at present.

India has seen investments worth about $35 billion across segments thus far, more than doubling India’s share of global fintech funding since 2016.

Given this, analysts believe the group’s financial services business will seek to become a conglomerate in its own right in the long run. However, the news didn’t set the stock market on fire. Shares of the company fell 1.5% on Tuesday, and analysts at Nuvama Research don’t expect the de-merger to be a ‘value changer’ for RIL.

They ascribe a value of 106 rupees per share for Jio Financial Services. On technical charts, the stock of Reliance Industries is struggling to cross the 2,800-mark. 

According to Avdhut Bagkar of Business Standard, RIL stock holding 100-WMA support since 2017. Double Bottom breakout to boost upside. Immediate hurdle at Rs 2,800. Next target: Rs 3,500

On Wednesday, markets will remain closed on account of Diwali Balipratipada.