Why the rush for digital assets in India?

Nine leading PE funds and sovereign funds have already invested in Jio Platforms at a total valuation of around $65 billion.The moral of the story appears to be a rush for Indian digital assets. What is driving this gold rush?

June 15, 2020 10:46 IST | India Infoline News Service
There is an informal story doing the rounds of investment banking circles that by the end of 2020 there will only be two classes of investors in the world; those who invested in Jio Platforms and those who did not. This is more in a lighter vein but it just goes to underline the kind of response that Jio Platforms has received across geographies.

Sale of Jio Stake Stake Sold INR Amt Implied Valuation
Facebook 9.99% 43,574 4,36,176
Silver Lakes - 2 Rounds 2.08% 10,203 4,90,529
Vista Equity 2.32% 11,367 4,89,957
General Atlantic Partners 1.34% 6,598 4,92,388
KKR 2.32% 11,367 4,89,957
Mubadala 1.85% 9,094 4,91,568
ADIA 1.16% 5,684 4,90,000
TPG Group 0.93% 4,547 4,88,925
Catterton Fund 0.39% 1,895 4,85,897
Total 22.38% 1,04,329 4,66,171
Data Source: www.ril.com

As the table depicts, nine leading PE funds and sovereign funds have already invested in Jio Platforms at a total valuation of around $65 billion. Discussions are still on with other marquee names like the Saudi Sovereign Fund and Microsoft about a possible stake sale. Interestingly, it is not just about Jio Platforms. Amazon has reportedly expressed interest in Bharti Airtel and Google has shown interest in Vodafone Idea. The moral of the story appears to be a rush for Indian digital assets. What is driving this gold rush?

Demand for digital assets

The big story in the midst of the Coronavirus pandemic appears to be the spurt in demand for digital assets. To quote Henry Kravis, one of the investors in Jio Platforms, “Few companies can influence and impact the digital ecosystem of a country as much as Reliance Jio can”. While it is true that Jio Platforms may have the first-mover advantage, other digital players like Bharti Airtel and Vodafone Idea are also likely to substantially benefit from the huge potential that Jio has prised opened. That is evident from the relative price performance of the 3 stocks since the bottom of March 24 this year.

Data Source: NSE

Since March 24, Vodafone has given 205% returns. While that is more of a low price effect, what is more interesting is that RIL and Bharti have also shown sharp appreciation in a short span of time. Both the stocks are trading close to their all-time high levels and both feature in the top-5 in terms of market capitalization. This performance has been clearly driven by the focus on digital assets. But why are digital assets becoming so valuable?

Yes, digital assets are becoming a lot more valuable?

When Jio was launched, it was radical because it made calls free and slashed prices of data to new lows. Most other telecom players had to follow suit. What has then made digital valuable now?
•   The price war is over and that is the good news. If you look at the average revenue per user (ARPU), it has improved sharply over the            last 2-3 quarters. After seeing their ARPUs dip below Rs.100, both Bharti and Vodafone have managed to improve the ARPU by cutting        down on low value customers. That is likely to positively impact profits.

•  The COVID-19 may have come as a boost to digital in much the same way as demonetization offered a big boost to digital money. During     the 3 months of lockdown, most companies had to shift to working from home. However, it was thanks to a combination of cheaper and         reliable bandwidth offered by the telecom players that WFH became practically possible. That has two key ramifications.

•  Post COVID-19, we could see a new model for the workplace. In the coming years, work places could become more collaborative and           companies may look for an opportunity to reduce the capital that is locked up in real estate assets. The likes of Infosys and TCS are               already looking at a hybrid workplace model, which could be more efficient.

•  The new digital model could also change the way people interface. Travel could be largely replaced by videoconferences, AGMs could be      replaced by virtual AGMs and even plant visits could be replaced by interactive virtual plant visits. These changes can open up a huge          world of opportunity for digital property owners in India.

•  If the market cap shift in the Reliance group is evaluated, the shift has largely happened due to the digital assets. Even the value created       by retail is more due to the value that a digital platform can create. The traditional cash cows like refining and petchem are no longer             adding much value to the group.

To sum it up, superior bandwidth and social distancing may have created the right recipe for the digital asset values to take off. To begin with, it is rerating the value of digital infrastructure providers. The show may have just begun!

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