What made Jio Platforms worth more than 50% of Reliance value?

In the first week of May 2020, Jio Platforms, RIL’s digital property, got two big PE funds to invest in their business. The deals happened at healthy valuations and give RIL the currency to monetize their stake in the digital business. What exactly were these deals and what is driving valuations for Jio?

Silver Lakes and Vista Equity

During the week, two large global PE funds; Silver Lakes and Vista Equity agreed to invest in Jio. Silver Lakes has bought a 1.15% stake in Jio Platforms for Rs.5656 crore while Vista Equity took a 2.32% stake in Jio Platforms for a sum of Rs.11,367 crore. Unlike Facebook, which had a natural synergy with the Jio Platform, for Silver Lakes and Vista, this was purely a private equity investment. Both the above deals valued Jio digital property at nearly $65 billion. That is a 12% premium to the valuation assigned to Jio Platforms by Facebook.

What is more interesting is that these deals have put the digital business of Reliance in a new perspective vis-à-vis the group. With an overall valuation of $65 billion, the digital business of Reliance accounts for more than 50% of the overall value of the group. This entire story happened in less than 4 years when Jio was first launched in India in September 2016. Mukesh Ambani loves to call data the new oil in its business model. The way the value of digital has grown in the last four years; Ambani may be bang on target. But what is driving valuations?

What makes Jio so valuable?

These steep valuations for Jio Platforms make one wonder; what makes Jio so valuable. There are four factors at play. Firstly, Jio Platforms is partly telecom and largely about digital plays. Hence the revenue and profit model is non-linear. Secondly, Jio has built the digital ecosystem which means it can own the customer and create multiple streams of revenues from the same customer. Thirdly, Jio is best poised to leverage on the network effect. The way the network effect works is that once the market size achieves a degree of scale, repeat customers happen purely through the viral network effect. That opens up the potential for Jio to grow revenues and profits geometrically than arithmetically. Lastly, Jio is now being monetized to make Reliance group zero net-debt. That will substantially reduce the financial risk that the group had taken on to fund the digital venture. In short, this deal marks the move towards a debt-free multiplicative model.

Are there risks to valuations?

For now, the strategy appears to be working to a “T”. The profits of refining and petchem have helped build Jio. Now that debt is being unwound. The real risk in the digital space could come from competition from the likes of Amazon and Wal-Mart. For now, the Indian market is large and deep enough to accommodate many of them!