Here’s why going public makes sense for Reliance Jio

India telecom upstart Reliance Jio may be going for an initial public offering (IPO) in the next two to three years, according to media reports today.

Company insiders have said that the Indian conglomerate (Reliance Industries) will take Jio public once the revenue earned from its consumer goods business (which includes Jio) exceeds that of its energy products business - something that is expected by 2020.

Reliance’s consumer business mainly comprises its holdings in retail and telecoms. An IPO will help the conglomerate separate its telecom venture from its other businesses.

In December 2017, Mukesh Ambani, the owner of Reliance Industries and India’s richest man, was said to be mulling an initial public offering (IPO) of Reliance Jio by early 2019. The timeline for the IPO has likely been extended so that Jio can reach a certain market share or a level of financial strength before its parent company reduces its level of ownership.

Not a matter of if, but when

Given the scale and ambitions of Reliance Jio, it is no surprise that it is planning an IPO. For a company to grow beyond a certain size, it needs the type of financing and greater visibility afforded by going public.

This is why an IPO has become the go-to approach for companies to get funds for acquisitions and future growth. It makes a company less reliant on debt.

Unlike debt, equity does not involve repayments but it does give away ownership. An IPO helps a company raise a lot of money and spread the risk of ownership among a lot of people. Essentially, the original owner(s) of the business (in this case Reliance Industries), give up part of their own percentage in the company to third parties, in return for money.

However, going public does have its disadvantages. In addition to the burden of higher regulatory compliance, a company is extremely vulnerable to market sentiment. For example, if the CEO of Jio were embroiled in a corruption scam, its share price would plummet.

Gunning for the top spot

Jio, which was launched in September 2016, has disrupted India’s telecom market in a very short time, triggering a race to the bottom in terms of subscription prices. Backed by billions of dollars worth of investments from its rich parent, the company has lured customers with ultra-cheap data and voice packages. Its competitors, Airtel as well as Vodafone and Idea (which are in the process of merging) have been compelled to do the same, thereby sacrificing short-term profitability for the sake of market share.

By the end of March 2018, Reliance Jio had around 186.6 million subscribers, making it the third-largest wireless operator in terms of subscribers. It also turned profitable, earning a net profit of ₹7.2 billion for the year.

Looking ahead, it has its sights set on the number 1 spot in the market. It is also planning to explore other revenue streams like wireless solutions for corporate enterprises. To achieve and, more importantly, fund the pursuit of these goals, it will need to go public.