It makes sense to pay more for a stock whose earnings grow at a faster rate. That is the reason why when a sector gets discovered first as a fast growing sector we see a sudden rush of money in that sector. If it is midcap stocks then it deserves to be paid more. Now, how much more should be paid is the question. One of the ways is to determine by dividing a company’s PE multiple with its growth ratio.
It might surprise many of you, ask your driver, your help at home, or the small chai shop owner how much interest he pays when he or she takes an unsecured loan taken in the private loan market. He or she might be paying four to five times more than the interest rate which any regular bank charges on an unsecured loan. That is what led to the birth of microfinance companies, now many of them are small finance banks. They are providing lending at the lowest end of the pyramid. Their interest rates were higher than normal banks would charge, but would surely much lower than what private money lenders in these parts of the country charges. That is where the opportunities are present for these small finance banks. After a phase of tough regulatory challenges, they have emerged stronger.
It is one of the riskiest spaces not only in markets but in the economy also. The reason, not only headwinds in terms of continued policy change risk, but the business itself is fraught with risks of more competition and uncertainty of any economy. However if one looks at the numbers of multibagger this industry has thrown, that is pretty impressive. The other side of the story is that it has also thrown a number of companies into bankruptcy. So, essentially, if one gets it right then there is money and if one does not then even capital it is at risk.