Jio Financial shares hit 5% lower circuit. Here's why

Shares of Jio Financial Services hit a lower circuit limit in Monday's trade amid concerns over likely passive outflows following the removal of the stock from key stock indices in three days. A Nifty exit for the stock post the third day of listing could trigger $290 million outflows while an exit from Sensex could trigger $175 million outflows, Nuvama Institutional Equities estimated ahead of the stock listing.

"In case, during the first two days of these three days, the spun-off entity hits the price band on both days, then the exclusion date shall be deferred by another three days. After observing two consecutive days of the spun-off entity not hitting the price band, the spun-off entity shall be removed after the third trading day of such observation. If on such a third day spun-off entity again hits the price band, the exclusion of such stock shall not be deferred any more," Abhilash Pagaria of Nuvama said.

Nuvama said FTSE had earlier decided to remove the stock from its indices and assign a zero value as the scrip did not get listed within 20 business days. "But as it has started trading, the index guys can sell the stock on August 21. This could result in an outflow of $190 million on August 21," it noted.

The stock got locked at a 5 per cent lower circuit limit at Rs 251.75 on BSE.

CLSA in a separate note said by the virtue of owning Reliance Industries, CLSA’s India focus portfolio has ownership of JFS, but an exit will be pencilled in at the first 30 minutes weighted average price since it prefers banks.

CLSA noted that other than a stake in RIL, liquids worth $2.5 billion or Rs 33 a piece have been demerged into JFS. This can support a loan book of $13-15 billion, CLSA said. The foreign brokerage noted that even at the speed of the recent annual loan book additions of sector leader Bajaj Finance, JFS will take nearly three years to fully use up the amount. most lending financials trade below 3 times price to book ratio, except Bajaj Finance and Cholamandalam, which have return ratios of over 20 per cent. This, CLSA said, will need a PAT of over $500 million for core JFS.

Analysts are, meanwhile, positive on long term prospects of JFS.

G Chokkalingam, Founder at Equinomics Research said existing investors should not worry much as the stock looks reasonably valued. He advised new investors to buy the stock in a staggered manner and felt a target of Rs 300 on the stock is possible.

"One should not worry at all. One should go by valuations. The medium and long-term outlook is strong for JFS. Investors, who are holding it, can hold the stock. Those investors looking to buy it can buy even today. The foreigners must be selling the stock today to rejig their portfolios. I can't recall a single stock from the Reliance group stable that disappointed Street in last few decades. At treasury value of Rs 1 lakh crore, even if we put it at 1.5 times, it is equal to prevailing market valuation. The kind of exposure JFS will have to Jio platforms and retail and the management's ability to scale the business makes us believe that the scrip may soon command a price to book ratio of 3 times," Chokkalingam said.

JFS can trade around Rs 170 to Rs 220 levels in the short term as per business valuation and discount of holding company, said Ravi Singhal, CEO at GCL Broking. As the company holds treasury shares. They will come in the market for sale and help JFS get cash and increase its book value in the long term, he said.

"Long term investors can keep this stock for a target of Rs 340," Singhal said.

 

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