Why Investors are rooting for Jio Platforms?

Jio Platforms accounts for over 50% of the overall valuation of Reliance group. Why are global investors willing to pay top dollar for Jio Platforms?

May 08, 2020 10:05 IST India Infoline News Service

In the last one month, there have been 3 big deals struck by Reliance Industries to monetize its stake in Jio Platforms, the digital property of Reliance group. The 3 deals for stake sale have been all done at fairly attractive valuations.
Nature of Deal Stake Sold Implied valuation for Jio Platforms
Sale of Jio stake to Facebook 9.99% for $5.79 billion $58 billion
Sale of Jio stake to Silver Lake Fund 1.15% for $0.75 billion $65 billion
Sale of Jio stake to Vista Equity Partners 2.30% for $1.50 billion $65 billion
Average monetization till date 13.44% at $8.04 billion $60 billion
 Data Source: RIL
 
Jio Platforms accounts for over 50% of the overall valuation of Reliance group. While Facebook has a business synergy with Jio, Silver Lake and Vista Equity are PE funds. Why are global investors willing to pay top dollar for Jio Platforms?

Jio Platforms is different from Jio Infocomm
Data Source: RIL

A common refrain among sceptics is that the telecom business is capital intensive and has a long gestation. That would entail too much risk even for PE investors. However, Jio Platforms is not just Jio Infocomm as it encompasses all the digital properties of the Reliance group. Traditional telecom business has a problem that the business model is linear and ARPUs are likely to be under constant pressure. As the chart above shows, the ARPUs have been declining over the last 6 quarters. This is despite telecom becoming a virtual duopoly and Vodafone Idea struggling with legacy problems. That is where the larger Jio platforms become valuable as it offsets the risks of Jio Infocomm with its non-linear model.
 
Importance of Jio Platforms’ non-linear model
 
Jio Platforms houses the digital assets of Reliance Group over and above its basic connectivity assets. Apart from mobile, broadband and enterprise solutions; Jio Platforms also encompasses properties including video content, music, natural language processing, regional language technology as well as e-governance. In short, Jio Platforms owns the entire digital experience across the Reliance group and that allows monetization of the customer base for multiple revenue streams. That makes the business model of Jio Platforms non-linear. The revenue growth, therefore, can be geometric rather than arithmetic once the customer is on-boarded and sold on to the Jio digital ecosystem.
 
PE Funds are betting on Reliance’s ability to monetize
 
The big challenge for any global digital platform has been to achieve the combination of sustainable revenue models and geometric growth. That is what justifies the massive investments in such properties. The big boost for monetization comes from the network effect. Here is how it works! The Facebook deal allows Jio Platforms to leverage the massive Facebook and WhatsApp community in India to enable and empower smart retailing. With “Jio Meet”, the platform is on target to build a palate of super apps as its Asian counterparts like Alibaba and Tencent have successfully done. A recent BOFA report has highlighted that the focus of ecommerce investments is shifting from ads to payments and enablement of commerce. To take an analogy, Tencent captured 40% of the Chinese digital market place with the help of its We Chat app.
 
To sum it up; Silver Lakes and Vista Equity may be the beginning as technology investors look to participate in lucrative digital ecosystems at an early stage. As Reliance moves towards zero net-debt, most investors would be looking at geometric market potential with almost no financial risk. That could be the icing on the cake for Jio investors!

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