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SME IPOs are shining, but experts advise caution

SME IPOs in the past year have outperformed mainboard companies in terms of both listing gains and returns over the past year.
SME IPOs in the past year have outperformed mainboard companies in terms of both listing gains and returns over the past year.

Summary

  • Over the past year, SME IPOs have outperformed mainboard firms in listing gains and returns

Mumbai: The public listings of small and medium-sized enterprises (SMEs) have outperformed mainboard companies in terms of listing gains in the past one year as relatively lower free float has caused a surge in prices when demand is disproportionately higher than supply in a structural bull market. However, market experts cautioned investors to take an informed decision while picking SME IPOs and invest only in quality businesses, as a rising tide lifts all boats.

SME IPOs in the past year have outperformed mainboard companies in terms of both listing gains and returns over the past year. They have listed with a median gain of 12.1% on their offer price, compared to 8% for mainboard IPOs. Their median annualized returns since listing is 61%, higher than the 52% for mainboard IPOs. The BSE SME IPO index has also outperformed the BSE IPO index, returning 123% in the past year, compared to 36% for the latter.

The BSE SME IPO index includes SME stocks that were listed a maximum of three years ago, and the BSE IPO index includes mainboard stocks that were listed a maximum of a year ago.

However, around 40% of the 169 SME IPOs considered in the analysis have lost share value since listing, while the share is 28% for the 50 mainboard IPOs. This shows the caution that investors need while investing in SME IPOs based on short-term bull runs. The analysis covered all IPOs from the one-year period since 17 November 2022.

"In bullish markets, the relatively smaller size of the issue and low liquidity can turn out to be an advantage especially if demand is higher than supply of promising offerings from quality companies. A similar trend was seen in SME IPOs during the year 2016/2017 wave but it did not end well for many retail investors," said Gaurav Dua, SVP & head Capital Market Strategy, Sharekhan by BNP Paribas.

"There have been some very interesting and promising businesses that have got listed through the SME platform. So rather than chasing short-term listing gains and chasing the momentum, it would be better to do your homework and be very selective while investing in SME IPOs," he said.

Some of the best-performing SME IPOs in this period include Rajasthan-based Goyal Salt Ltd, which listed with a 242% gain over the issue price of 38 on its debut on 11 October, followed by Sungarner Energies Ltd, which opened at 250 on 31 August, a premium of 201% over its issue price. Basilic Fly Studio Ltd listed at 271 on 11 September, a premium of 179% over the issue price of 97. Baheti Recycling Industries Ltd (167%), Oriana Power Ltd (156%), and Infollion Research Services Ltd (155%) came next.

Among mainboard IPOs in the period, the best-performing ones in terms of listing gains were Ideaforge Technology, which listed at 1,305 on 7 July, a premium of 94%, Netweb Technologies (89%), and Aeroflex (83%). Also on the list was Utkarsh Small Finance Bank, which had issued shares at 25, opening at 40 on 21 July, clocking a remarkable premium of 60%.

According to a report by EY India on 1 November, the small and medium enterprises segment of the IPO market recorded significant success in Q3 2023, raising $165.76 million through 48 IPOs. The strong performance of the SME IPO market was one of the factors driving India's overall IPO market to a record-breaking quarter. In Q3 2023, a total of 21 IPOs were launched on the mainboard, raising $1,770 million, a significant increase of 376% over $372 million in Q3 2022. This represents a remarkable 425% increase in the number of deals.

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