I am an aggressive Financials guy and holds a 90+% portfolio in Banking and finance stocks.
The entire world runs on credit, our system is designed to take debt and take more and more debt and never to repay back. Even if everyone were to repay, there isn’t that much money in the system(Due to interest component). Only way the world is going to progress is by building more and more credit in the system. It’s a one-way ride- no doubt.
So, there is literally unlimited runway for financials. So, these companies will continuously make truck loads of profits for unlimited time and will contribute to big % of total country profit pool.
I have started researching Reliance industries .
Their Refining and petrochemicals business- Massive. Literally Massive. Their outstanding project execution in building multi Lak cr refining and manufacturing facilities. Such a unique massive scale with literally no other company having the guts to build or even imagine building or competing in their scale.
JIO- another massive telecom investment and such a unique asset base(Tangible-Towers,Fiber,network etc)+Retail franchise+ Digital platforms with massive loyal base.- Massive
Retail business, with massive 12k stores[Imagine the supply chain and project execution hurdles]+ Reach+ Customer access +Leases+inventory management+ Ability to build multi billion dollar brand through it’s network.- Masssive
Each of these businesses have 50+kcr PAT potential- Massive and unique assets.
Now, When I compare earnings from Reliance and a bank(Say HDFC Bank)
Efforts and value creation by reliance for generating 30kcr Profit is far far far massive than that of what is made by an HDFC Bank for their 30kcr PAT.
I somehow got huge respect for non-financials/Non-commoditised business entrepreneurs for their efforts in this value creation process.
Another example to feed upon:
Piramal enterprises has built a 50kcr loanbook with 3% type ROA and 1k+cr PAT. Can you imagine how many customers do they have ? less than 500. They can manage entire portfolio in a excel sheet. they don’t even need a core banking solution from nucleus or even building complex lending,monitoring & collection scorecards, no automation for bureau submissions,not CIR stuff etc etc. Nothing. You have excel sheet +equity+processes+people that’s it, you have top 10 NBFC in India.
Imagine how many non financials entrepreneurs can make such kind of profits with such comparatively less efforts? None.
Same is the case with many non bank finance companies that i see, finance is the major profit machine with less efforts in their entire group companies Bajaj Fin,Chola, Mahindra etc
I feel like Banks are creating credit and making profits, Other industries and services businesses are boosting their profits pools out of the credit generated at the expense of banks taking risk on their books.
One more example:
None of these world’s biggest banks with trillions of dollars in assets are valued at more than 500bill$
companies that make less these profits are valued at multiple times more than that.
++ Casestudy of JP morgan launching a cobranding credit card with apple. where JP morgan did all the dirty work in building the entire solution and apple simply dictating terms.
I am doubting my strategy on going with 90+% financials now, maybe soon there will be a day where all the financials trade at below book and value addition business will more and more strategic value and will trade at far far higher premiums that that of bank valuations.
Maybe my thought process is wrong and we will stand to get rewarded generously in financials too. Maybe Profits, Profitability, and earnings growth only matter and not how they make it.
Note: I know that financials are valued at Bookvalue, ROA stability, blackswans street(1/5,1/10,1/100s) - stable PAT is taken as a metric for better comparison in above case.