General Atlantic and Saudi PIF look set to follow Facebook, Silverlake and Vista Equity Partners in making substantial investments in Jio Platforms – but earning a return on a $58.6 billion valuation will require a long wait.
Jio Platforms is the leading mobile phone service provider in India, and while it has significant engagement from its 387 million users, its revenues are far more modest.
In the year ending March 2020, Jio Platforms generated $9.1 billion in revenues from which it earned a healthy $1.9 billion in EBIT.
This means that Facebook is investing in a telecom provider at a valuation of 6.5 times the 2020 revenues and 30.8 times 2020 EBIT.
British Telecom trades on around 9.0 times 2020 EBIT with Verizon around 13.0 times 2020 EBIT.
Jio Platforms has many times more customers than either Verizon or BT, but critically these customers are worth far less as they have much less money to spend.
In the year to March 2020, Jio Platform’s customers generated $1.96 per user per month, which is a reflection of the relative wealth of users in India compared to the UK or USA.
However, Jio Platforms is growing much faster with user growth of 26% YoY and revenue growth of 41% YoY in the last 12 months compared to either BT or Verizon that both operate in mature markets.
Higher growth deserves a higher multiple, and it is this, plus the opportunity for further growth, that has convinced Facebook to pay such a high price.
The partnership between Jio and Facebook is very beneficial for both parties as almost all of Jio’s subscribers are WhatsApp or Facebook users giving Facebook better vertical integration when attacking this opportunity.
Outside of the usual sorts of services, it is e-commerce where Jio Platforms is currently the most aggressive, and I suspect that it intends to use Facebook’s systems for payment and communications between merchants and shoppers.
The current pandemic is spurring a further acceleration to online shopping away from retail and India looks certain to be no different.
This, combined with a favourable regulatory environment that hinders both of the foreign-owned e-commerce leaders (Flipkart and Amazon), creates an opportunity for Jio to come in from behind.
I think that this is the most significant opportunity for Jio as, at $2.96 per user per month in India, it has already signed up most of the affluent Indian users. It now needs to address other areas where they spend money to see the growth that Facebook has already paid for.
I suspect that this is where the majority of this investment will go, but Jio Platforms will also use this to push its own Digital Life services.
Given the dominance of Google and Facebook in India, this will have to be in services that are specific to India, for example in the area of agriculture, education or entertainment that is very specific to India, like Bollywood music.
Jio Platforms is India’s best shot at a home-grown digital ecosystem but how long it will take to generate value for Facebook and the other investors is another question entirely.
The pandemic is likely to help Jio Platforms, given how crucial digital services have become in other countries. Still, I think it will be a long time before Jio Platforms is ready to IPO, which must be the exit router that Silverlake and company are looking for to generate a return.