It seems there is a never-ending line of investors lined up to purchase stock of Jio Platforms Ltd. It all began with Facebook Inc. making a strategic investment of ₹43,574 crore ($5.7 billion) for a 9.99 percent -stake in the company.At the same, Reliance Industries Ltd (RIL) parent company claimed it had accomplished half the expected value-unlocking in Jio Platforms, and that foreign investors had shown interest in a equally significant additional position.That could have meant either raising about $5.7 billion more from Jio Platforms, or selling another 10 per cent stake.
Yet as it turned out, the firm has now sold an extra 12.4 per cent interest to institutional buyers and earned an estimated $8 billion. Jio Platforms is signing up investments at the rate—$1.3 billion a week over the past six weeks — it could well soon reach the $15-billion mark.It’s almost as if the pause in Saudi Aramco’s $15-billion transaction doesn’t matter when it comes to the specified aim of RIL to minimize debt in its accounts. And, to note, the $7-billion rights issue has been oversubscribed 1.6 times — though this year just a fourth of such funds would be earned through the phased payout option.
On RIL, where traditional oil-linked businesses have taken a hit owing to covid-19, strong investor interest in Jio Platforms is rubbing off broadly. RIL shares have gone up by about a third since the Facebook investment was announced, compared with an increase of less than 10 per cent in the Nifty 50 index over the same period.So, what drives investors towards Jio Platforms by the droves? For example, Jio crosses a variety of boxes like tested implementation, an almost debt-free financial base, and being on the right side of legislation. Yet the truth persists that private equity firms are cash-flowing too. “The competition for assets remains high, a consequence of capital-seeking investment being superabundant.Prequin reports that there are about $2.5 trillion in dry powder allocated to private capital investments,”PwC said in a February survey.This has also meant shares in internet giants like Amazon and Twitter have increased following the outbreak in coronavirus, in direct contrast to the overall decline in stocks. Personal distancing also made greater usage of hardware and automated technologies, bringing consumers into software firms.
Through positioning Jio as a digital network service, RIL has tapped into an growing interest in technology investments. Investors dream of a day when consumers use a Jio device to chat, buy, invest, read, compose, cook, watch and listen to digital content and book a holiday.The Facebook link provides heft, as it will theoretically leverage the enormous database of consumer data and interests to better reach consumers.”Investments by technology investors will help place Jio as a tech giant instead of just a telco,” analysts at CLSA said in a study on May 22, after KKR revealed a $1.5-billion investment in Jio Services. Of course, it’s one thing to be placed as a tech giant, and quite another to execute on the pledge by successful monetisation.Despite an investor funding of $13.7 billion, prosperity may sound like a foregone conclusion, but concerns persist, as some observers point out.
Digital premium
The high competition for assets often leads to an inflated purchase price. On an EV / Ebitda basis, Jio Platforms is estimated to be about 35-40 per cent higher than Bharti Airtel Ltd. EV is business income and Ebitda is profit before taxation, taxes, depreciation and amortization.While Airtel ‘s India business, excluding the value of its stake in Bharti Infratel Ltd, is estimated at approximately 9.5 times Ebitda for FY22, PE companies have attributed a value of approximately 13.5 times to Jio Platforms, a multinational brokerage analyst points out, requesting anonymity. This is obviously not an apple-to-apple analogy, since Airtel is only mostly regarded as a telco.Almost as if to buttress its digital platform claim, Jio launched JioMart soon after the Facebook deal. The e-commerce venture, which used the popular WhatsApp as the interface for Facebook, has had some teething problems, although investors seem enthusiastic about the venture’s long-term prospects.Besides, Jio has already acquired a variety of companies such as the music streaming service Saavn and education development firm Embibe, boosting expectations of the formation of a superapp.
Regulatory advantage
Jio’s e-commerce operations are a big part of market conversations recently. India recently declined an application from Walmart-owned Flipkart for entry into the food retail market. Throughout the past, international investment has been a frequent point of contention with the government in the e-commerce market.While there are similar concerns with Amazon’s India operations, with Jio, because of her domestic identity, these problems disappear. While this does not mean that the investments made by Amazon and Flipkart in the country are write-offs, it certainly puts Jio at an advantage when it comes to being on the right side of regulation.Although the digital platform’s eventual success can be debated, the fact remains that PE investors appear to be convinced. For them, in a worst case scenario, they may have overpaid only by subscribers for the largest telco in one of the biggest markets.
“It’s worth noting that the telco piece itself comes with no legacy issues suffered by peers like Airtel and Vodafone Idea, both in terms of operating costs and regulatory duties. Besides, the balance sheet is completely debt-free. But, long before we hit the superapp’s optionality, Jio crosses several boxes, “says an analyst at a business employed to handle the rights problem for RIL.Jio has a 35.4 percent market share in sales in the quarter in December 2019, more than the 32.4 percent share of Airtel and the 26.2 percent share of Vodafone Idea, according to analysts at SBICAP Securities Ltd. Given the woes of Vodafone, analysts estimate that Jio will have a market share of 42 per cent by the end of the current financial year.
While Jio ‘s execution of Jio’s telco piece has been successful, technology capabilities and, more so, the ability to monetize it, are yet to be displayed. As pointed out earlier, it’s hard to treat progress as a guarantee.For one aspect, in several of the verticals that Jio Platforms is targeting there is still worthwhile rivalry. Second, for all RIL projects success can not be taken as a given, even going through past history. “RIL’s upstream oil and gas foray in 2008 is an example of aspirations that do not materialize even alongside a global major like BP,” analysts at Macquarie point out.For now, RIL holders will rejoice that their company is making the best of private equity capital’s superabundance.