The author is a Reuters Breakingviews columnist. The opinions expressed are her own. Refiles to add conversion of Indian rupee into US dollar in the second paragraph.

By Shritama Bose

MUMBAI, Oct 16 (Reuters Breakingviews) - All that glitters isn't gold when it comes to India's richest man. When Mukesh Ambani lists his telecom business in Mumbai next year, it will be a blockbuster event for the country's capital markets but it also will crystallise underwhelming returns for the world's biggest tech companies, private equity firms and sovereign wealth funds who backed his consumer unit in 2020. It heralds a reset of how foreigners view tycoons and competition in the country.

Five years ago when the Covid pandemic was shaking the world, Ambani's conglomerate Reliance Industries RELI.NS sold 1.5 trillion rupees ($16.99 billion) of stock in Jio Platforms to investors led by Meta Platforms META.O, KKR KKR.N and Saudi Arabia's Public Investment Fund; the flood of funds into India at the time was so large it caused a spike in foreign direct investment.

At 5.16 trillion rupees including debt, or $59 billion at current exchange rates, the landmark fundraising valued Jio's enterprise at 23 times its EBITDA, a multiple twice its nearest rival Sunil Bharti Mittal's Bharti Airtel and one reminiscent of a fast-growing technology startup.

Part of the hype was justified. The telecom unit Ambani founded in 2016 rose quickly by launching a bruising price war and was given a wide berth by India's competition authorities. Jio became the country's top provider of mobile services and helped to push down data tariffs to the lowest in the world. It even accelerated the bankruptcy of Reliance Communications RLCM.NS, led by Ambani's brother Anil. By the time Ambani welcomed outside investors, India's telecoms market had shrunk to a quasi-duopoly with a joint venture between Britain's Vodafone VOD.L and Kumar Mangalam Birla as a weak third player.

Fast forward and Jio had 498 million voice and data customers as of June 30 . Yet while this consumer business within Ambani's oil-to-retail conglomerate has continued to grow, it also has failed to live up to expectations in some striking ways.

Five years on from its fundraising, Jio's enterprise, including net debt, is valued at 10.6 trillion rupees, based on an average estimate of six brokers. That is nearly twice the value investors assigned it in 2020 or equivalent to an annualised return of nearly about 15%, one percentage point more than the annualised gross return of the MSCI India Index over a five year period. Private equity investors typically target returns of 20% and much higher in India.

Measured a different way, Jio's potential return could be even lower. The enterprise is worth just 8.7 trillion rupees if it is valued on 10 times its EBITDA, the same multiple Bharti Airtel commands. At that valuation, Jio would hand its backers including KKR, Silver Lake and TPG, an annualised return of just over 10%.

One problem is that Jio does not look like a "next generation technology platform". In 2020, Jio talked up a dazzling list of investments across its "digital ecosystem" including in "smart devices, cloud and edge computing, big data analytics, artificial intelligence, Internet of Things, augmented and mixed reality and blockchain". Although Jio doesn't have legacy 3G infrastructure to manage like its rivals, it still makes 87% of its revenue and 94% of its EBITDA from its basic communications unit Reliance Jio Infocomm RELJ.NS rather than from digital services, per CLSA analysts.

What's more, Jio's customers spend less than Airtel's. Average revenue per user has grown 60% over the last five years to 209 rupees ($2.37) but that lags the 250 rupees Airtel's India users churn out. Airtel's EBITDA margin for India and South Asia is also higher than Jio's by a staggering 770 basis points and its current offerings in cloud and artificial intelligence services closely mirror its challenger's.

Nor does Jio appear to have delivered on its strategic ambitions. Meta's Facebook pumped $6 billion in for a 10% stake but Ambani - whose Reliance conglomerate is also the owner of India's biggest retailer - did not lure millions of small grocers to transact on the payments system on WhatsApp, the U.S. company's social messaging platform - as was widely expected.

The rise of quick-commerce operations by Prosus-backed Swiggy SWIG.NS and Zomato-owner Eternal ETEA.NS killed Reliance Retail's 2022 attempt to enable grocery shopping through the messaging app. Similarly, Alphabet's Google GOOGL.O invested $4.5 billion in Jio but demand for the low-cost smartphone the duo launched in 2021 was weak; the telecom operator's wide reach didn't guarantee it a market.

Ambani's backers underestimated the strength of competition in India. They would have been better off if they had backed Bharti Airtel. Its shares have returned roughly 40% annually, including dividends, since 2020, significantly more than Jio looks set to deliver. Google enjoyed some of those spoils by hedging its bets: In 2022 it invested up to $1 billion in Jio's rival.

If Jio's returns are underwhelming, crystallizing them will be tough too. Ambani will need to launch one of India's largest initial public offerings. If 5% of the company's outstanding shares swap hands at a $120 billion valuation, Jio's bankers would need to find new owners for $6 billion of stock. That would be far too much for India's capital markets to swallow: Hyundai Motor India's HYUN.NS 279 billion rupee offering in 2024 remains the country's largest IPO, followed by Life Insurance Corporation's LIFI.NS 210 billion rupee deal in 2022.

Ambani could offer half the amount of stock or roughly $3 billion, using new rules from the Securities and Exchange Board of India but that would leave financial investors with billions of dollars of investments in Jio waiting for an exit; strategic investors, who may be willing to sit on their positions, bought about half of the $17 billion Jio initially raised.

Some of Jio's backers may still conclude that the investment was worth it. The dominance of family-led businesses in India often means that striking partnerships is increasingly seen as a matter of survival rather than choice for global companies and a way to protect themselves in the market. Global asset manager BlackRock BLK.N and China-founded online fast-fashion Shein are among others who are partnering with Ambani.

Yet an underwhelming payoff from Jio will strengthen the case for more scrutiny when foreign investors choose their local alliances in the future.

Follow Shritama Bose on LinkedIn and X.

CONTEXT NEWS

Reliance Industries will list its telecommunications unit by mid-2026, Chair Mukesh Ambani said at the conglomerate's annual shareholder meeting on August 29. "We are aiming to list Jio by the first-half of 2026, subject to all necessary approvals," he said.

Jio Platforms is targeting India's largest-ever initial public offering, IFR reported on September 5, citing unnamed bankers.

(Editing by Una Galani; Production by Aditya Srivastav)

((For previous columns by the author, Reuters customers can click on BOSE/shritama.bose@thomsonreuters.com))