Why Covid-19 hasn’t dampened Jio’s fundraising prospects

Even as companies shut operations, dole out pay cuts and pink slips to employees, and brace for an uncertain, post-Covid-19 future, one company has defied the odds to raise a significant quantum of capital.

The novel Coronavirus outbreak in India, and a consequent nationwide lockdown that’s extended for close to two months now, has barely managed to take the sheen off Jio Platforms Ltd (JPL)—the digital services, mobile telephony and broadband wireless arm of Reliance Industries Ltd (RIL)—which has managed to raise over ₹78,000 crore from a clutch of leading global technology investors in the last one month alone.

To be sure, RIL hasn't been immune to the economic challenges posed by the Coronavirus pandemic either. Its crude refining and marketing business took a hit in the quarter ended March 31 on account of inventory losses, due to the sharp fall in crude prices. This resulted in the company reporting a year-on-year decline in profitability for the last quarter of FY20. As a result, RIL handed employees pay cuts ranging between 10% to 50% depending on their seniority. RIL chairman Mukesh Ambani has also decided to forego his annual compensation of ₹15 crore. But all this hasn't impacted the company's ability to raise the big bucks for its consumer-facing digital services business.

The most recent fundraise announcement came on Friday when RIL announced that global private equity giant KKR was picking up a 2.32% stake in JPL for ₹11,367 crore. With this transaction, JPL has offloaded around 17.15% of the promoters’ stake in the enterprise, which is being positioned as a technology platform company akin to global heavyweights like Google’s parent company Alphabet and Amazon. Apart from KKR, the company’s investors include Mark Zuckerberg-led Facebook (9.99% stake), and global private equity firms like Silver Lake, Vista Equity Partners, and General Atlantic.

Henry Kravis, co-founder and co-chief executive officer of KKR, summed up the value that global investors like his firm see in JPL well.

“Few companies have the potential to transform a country’s digital ecosystem in the way that Jio Platforms is doing in India, and potentially worldwide. Jio Platforms is a true home-grown next-generation technology leader in India that is unmatched in its ability to deliver technology solutions and services to a country that is experiencing a digital revolution,” Kravis said in a statement issued on Friday. “We are investing behind Jio Platforms’ impressive momentum, world-class innovation, and strong leadership team, and we view this landmark investment as a strong indicator of KKR’s commitment to supporting leading technology companies in India and Asia Pacific.”

The immediate rationale behind the slew of deals announced over the last four weeks is obvious: RIL needs the money to pare debt, as the Mukesh Ambani-led company seeks to become net debt free by March 2021. RIL’s total outstanding debt as on March 31 stood at ₹3.36 lakh crore, while it had cash and cash equivalent of ₹1.75 lakh crore. In addition to the funds already raised by monetising a part of its stake in JPL, RIL has other plans to raise resources for debt reduction. These include a partnership with the U.K.’s BP Plc for downstream fuel retailing in India, which is expected to bring in another ₹7,000 crore; a ₹53,000-crore rights issue that will bring in money in tranches till June 2021; and a proposed divestment of 20% stake in the company’s oils-to-chemicals business in favour of Saudi Aramco. Though the company’s observers raised questions over the fate of the $15-billion deal with Aramco, given the global pandemic and related disruptions, including a steep fall in crude oil prices, RIL has assured investors that the talks with Aramco are progressing as planned.

According to a recent research report by Bernstein, the slew of deals that RIL has managed to strike and tangible plans for further monetisation of assets like optic fibre cable network and telecom towers gives “line of sight” to a net cash position by FY22.

Apart from the clear motive of debt reduction, the timing of these transactions related to JPL, and the kind of global investors that the company has managed to attract (and may continue to attract in the future depending how much of the company Ambani wants to sell), is also significant for other reasons.

First, it indicates that the world’s largest technology investors foresee a vastly different future for India post Covid-19. It is no secret that various forms of B2B (business-to-business) and B2C (business-to-consumer) digital technologies—comprising artificial intelligence; machine learning; cloud computing; analytics; digital content of consumption across entertainment; healthcare and education—were gaining ground in India even before the pandemic, powered by cheap and high-speed broadband connectivity. These winds of change will only gather momentum post Covid-19 as India relies on technology to empower enterprise and commerce with minimal human intervention. Indians are expected to work from home, learn from home, shop from home and even watch first-day-first-show films at home.

In this context, the JPL-Facebook partnership becomes all the more important. Between these two companies, there exists the potential to cater to all the aforementioned digital needs of Indian consumers and businesses. A research report by BofA Securities points to the success of super apps in Asia. Digital offerings like WeChat in China and Naver in South Korea have become hugely popular by offering ease of access to users by combining various services like social networking, shopping, payments, and ride hailing within a single app.

“Super apps are more successful in the east than the west (mainly led by user preferences, regulation, and how the markets evolved). We believe that a combination of a messenger service along with payments option increases the success possibility of a super app, driven by frequency of usage,” the BofA report stated.

Along these lines, the JPL-Facebook partnership could prove to be a game-changer with various avenues of monetisation possible. It could pave the way for creating a super app in India that combines multiple communications and e-commerce offerings. The potential user base justifies such a thought. Jio has 388 million subscribers, Facebook has 320 million users in India, WhatsApp has 400 million users and Instagram has 80 million.

For starters, a pilot integration of JPL’s grocery retailing app JioMart with Facebook-owned messenger WhatsApp is already underway. This partnership may even be extended to non-essential retail and a take-rate is charged for every transaction. Through its own properties, as well as investments in promising startups, JPL is in a position to offer a bouquet of content and services across entertainment, healthcare, and education. Eventually, some of these could be integrated with Facebook, WhatsApp and Instagram for better reach and monetised through subscription services. RIL’s retail business may also collaborate with Facebook for more targeted and effective advertising.

A stated objective of the JPL-Facebook deal was also to empower micro, small, and medium businesses in India, farmers, and small merchants. A potential solution for this universe of users could emerge from a combination of Facebook’s fledgeling online marketplace with Jio’s capabilities. The BofA report notes that Facebook Marketplace has been slow to gain traction in India as small and medium enterprises need in-person assistance, either from field agents or a customer support centre. “Jio’s partnership could help remove the friction by leveraging on its feet on the street team,” the report observes. “Furthermore, both could collaboratively work to digitise the kiranas.”

To be sure, monetising a super app is often more difficult than building one and this is where RIL and Jio’s strategy will eventually be tested. This is because the trade-off in a price sensitive market like India is often between between building a large and sticky user base vis-à-vis charging for services. But it is the possibilities made real by the coming together of Facebook and JPL, which appear to have led to a flurry of private equity interest in the latter.