Jio Financial shares: JFS hits 5% lower circuit again. What's dragging the stock lower?

Shares of Jio Financial Services (JFS) hit their lower circuit limits for the second straight session amid concerns over passive outflows. The demerged financial services business of Reliance Industries saw its shares locked at 5 per cent lower circuit limit of Rs 239.20 on BSE. They were down 5 per cent over their discovered price of Rs 261.85 in the previous session. Analysts said the weakness on the counter is driven by institutional selling and that the outlook for the counter is positive. 

"JFS’s valuation is based on expectations surrounding its future growth potential and its 6.1 per cent stake that it owns in RIL. The future growth prospects of JFS are indeed bright since it can scale up its business hugely with its enormous connection with consumers and merchants. But institutional selling is a drag on the share price in the near-term. Since the stock is in the T segment, institutional selling is dragging the price down," said VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services.

Mutual fund adjustments might trigger certain outflows, said Santosh Meena, Head of Research at Swastika Investmart. 

"While the short-term outlook is uncertain due to a lack of clarity about business direction and profitability, the long-term outlook remains optimistic, supported by its robust pedigree and extensive network—one of the industry's largest. The sector's bullish outlook further reinforces this perspective. Consequently, it's advisable for long-term investors to retain Jio Financial Services shares, while short-term investors can stay away. Anticipate potential insights into Jio Financial Services' future plans during the upcoming Reliance AGM," Meena said.

There are concerns over passive outflows on the counter, as the scrip exits key stock indices.  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.

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"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.

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.

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.

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"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.

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