SME IPOs have turn out to be a central focus for buyers searching for fast returns, with small and medium-sized enterprises more and more tapping the general public markets.
Based on Trivesh D, COO of Tradejini, retail buyers are viewing this as a beautiful—albeit high-risk—avenue for portfolio diversification. Between April 1 and October 31, 2024, India noticed a pointy rise in SME IPOs, with 169 out of 217 IPOs (virtually 78%) coming from SMEs. Regardless of the excessive variety of SME listings, they contributed solely 6% to the whole funds raised, a mirrored image of the modest capital these firms are capable of elevate per IPO, making them inclined to manipulation.
In 2024 year-to-date (YTD), SME IPOs have raised ₹8,288 crore, the best to date. Earlier than this, these IPOs raised ₹4,967 crore in 2023 and ₹1,995 crore in 2022.
Trivesh D additional famous that the rising prevalence of SME IPOs highlights their rising recognition amongst firms trying to go public. Information exhibits that SME IPOs have delivered important returns, with the median listing-day returns standing at 34.43% and a YTD median return of 33.09%. As compared, mainboard IPOs posted a imply listing-day acquire of 23% and a YTD acquire of 25%. This sturdy efficiency has caught the eye of high-net-worth buyers (HNIs), who’re optimistic about short-term returns however they might be overestimating the soundness of those good points, in line with Trivesh D.
The Evolution of SME IPOs
Trivesh D additionally identified that SMEs have reworked itemizing, with promoters initially specializing in short-term good points however progressively shifting in direction of a extra company outlook. This transformation has been notably noticeable as youthful generations and former staff have assumed bigger administration roles, bringing a extra strategic method to operations. Nevertheless, as a lot as this company shift has improved the general operation of many SME firms, Trivesh D cautions that these shares nonetheless pose important dangers for buyers.
Is It All Optimistic?
Whereas SME shares might seem to supply spectacular returns, Trivesh D emphasises that they arrive with inherent volatility. Features in these shares can usually masks weak fundamentals. He cites examples like Varanium Cloud, whose share value skyrocketed from ₹40 to ₹373, solely to fall to ₹15, and Rachana Infrastructure, which noticed its inventory rise from ₹184 to ₹1,250 earlier than plummeting to ₹84. These sorts of fluctuations spotlight the high-risk nature of investing in SMEs, notably for many who purchase into these shares at inflated costs, hoping for sustained development.
The BSE SME IPO Index, which tracks the efficiency of SMEs on the BSE SME Platform, skilled a 171% rally within the final 12 months, however by September 2024, it had fallen 13% in October whereas the broader index solely declined by 2%. Trivesh D acknowledged that this stark distinction signifies the risk-reward dynamic at play with SMEs. Regulatory our bodies like SEBI have raised considerations about value manipulation, with experiences of misuse of public funds in sure instances. Trivesh D urged that this highlights the necessity for stronger regulatory measures to curb such practices and defend investor pursuits.
Indicators of a Potential Bubble
Trivesh D additionally warned of a possible bubble within the SME IPO market, notably with the rise of pump-and-dump schemes, the place inventory costs are artificially inflated by deceptive data earlier than insiders offload their shares, inflicting costs to crash. This misleading observe can depart retail buyers holding depreciating belongings. He additionally notes that many SME IPOs have posted spectacular listing-day good points, however these good points are sometimes not backed by robust fundamentals, making it essential for buyers to rigorously monitor promoters’ holdings post-listing to gauge a inventory’s stability.
The SME IPO Index’s efficiency raises additional considerations, Trivesh D notes, because it surged from round 1400 in January 2021 to an astronomical 106,251 by November 2024, marking a staggering 154% improve in a single 12 months. This sharp rise far outpaces the 42% rise within the Mainboard IPO Index, suggesting that the SME IPO section is likely to be overheating. Trivesh D highlighted that such fast development is atypical in a wholesome market and signifies a necessity for warning.
Furthermore, Trivesh D identified that the sharp value rises in SME shares are sometimes not supported by constant revenue development or stable enterprise fashions. Many of those firms lack the regular earnings and sturdy monetary fundamentals wanted to justify their excessive valuations. This, coupled with excessive price-to-earnings (PE) ratios with out corresponding revenue development, raises pink flags in regards to the sustainability of those shares and their vulnerability to corrections.
Trivesh D additionally highlighted the incidence of collusion in some SME IPOs, the place promoters and operators have allegedly manipulated inventory costs. He cites the instance of ‘Add-Store E-Retail,’ which confronted allegations of inflated gross sales between affiliated firms to spice up its inventory value. Such practices undermine market integrity and might result in important losses for retail buyers, Trivesh D warns.
Pre-IPO allotments to operator entities have additionally been recognized as an element distorting market dynamics. Trivesh D defined that these allotments can create synthetic demand and provide imbalances, making it troublesome for retail buyers to gauge the true worth of those shares. Consequently, buyers might discover themselves at an obstacle, caught within the hype created by operators who’ve inside information of the inventory’s prospects.
What Ought to Buyers Do?
Regardless of the dangers related to SME IPOs, Trivesh D suggested discerning buyers to give attention to firms with robust financials, clear development prospects, and stable governance. He believes that India’s SME sector holds important long-term development potential, and for these keen to navigate the volatility, the present market dip may current alternatives to amass high quality SME shares at enticing valuations. Nevertheless, he additionally cautions buyers to needless to say SME shares are inclined to lack liquidity, which might result in increased prices when exiting positions.
Disclaimer: The views and suggestions made above are these of particular person analysts or broking firms, and never of Mint. We advise buyers to test with licensed consultants earlier than taking any funding selections.
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