Okay, let me clarify why only BFSI.
What is the business model of a finance company? You have Net Worth X. On the basis of that, you can leverage a maximum of say, 8X. So you have 9X to lend. You lend these 9X and generate your income. You cannot lend beyond 9X with Net Worth X because if you borrow more than 8X, your capital adequacy will fall below the regulatory minimum. Now assume next year, your Net Worth becomes 1.1X with the addition of Retained Earnings. So now you can leverage upto 8.8X. Your asset base can be maximum 9.9X. On this, you earn interest. You cannot go beyond 9.9X asset base for the same reason that you couldnât go beyond 9X last year. This is the base scenario without tax cuts.
But now due to tax cuts, you have higher Retained Earnings. So assume your Net Worth becomes not 1.1X but 1.15X. With this you can borrow upto 1.15X multiplied by 8 which is 9.20X. So your total asset base can go up to 1.15X + 9.20X = 10.35X. You earn income on 10.35X (due to tax cut) instead of 9.9X (without tax cut), which in turn leads to higher Retained Earnings in the year after that. This cycle repeats, compounding itself. Citerus paribus , your equity base (i.e. book value) is the only constraint to your growth rate because it limits your asset size. Tax cuts leads to higher Retained Earnings, leading to higher leverage leading to bigger asset base, leading to higher interest income leading to higher profits leading to higher retained earnings - and the cycle repeats. Thus, the intrinsic growth rate itself improves, and so a higher P/E can be assigned. This is the point Basant Maheshwari is making.
Why this will not happen in case of other businesses?
Taking DâMart as a hypothetical example - let us say, DâMart added 30 stores last year. Funds were not a constraint for opening 31. Thirty was the number operationally arrived at, based on their assessment of market opportunity, availability of premises, competition, management & manpower availability etc. Higher Retained Earnings would not have led to more store openings. Also, each existing store is already optimally stocked, it can accommodate only this much inventory and this many customers. Store sales or new store openings will not go up just because your tax rate came down . Hence, the intrinsic growth rate will not change â and so the P/E shall also remain the same.
BFSI companies present the purest form of intrinsic growth that comes from Retained Earnings in any business. You can almost arithmetically arrive at the improvement in growth rate due to higher Retained Earnings. For other business, growth rate remains the same, and so P/E will remain the same. Among non-BFSI businesses, one can say that companies having debt will experience faster growth than companies with zero debt, since improvement in debt repayment capacity and lower interest cost will add to the bottomline.
Of course, we are not considering second order effects in all of this but only the direct effects.