SME IPOs have become a central focus for investors looking for quick returns, with small and medium-sized enterprises increasingly tapping the public markets.
According to Trivesh D, COO of Tradejini, retail investors are viewing this as an attractive—albeit high-risk—avenue for portfolio diversification. Between April 1 and October 31, 2024, India saw a sharp rise in SME IPOs, with 169 out of 217 IPOs (almost 78%) coming from SMEs. Despite the high number of SME listings, they contributed only 6% to the total funds raised, a reflection of the modest capital these companies are able to raise per IPO, making them susceptible to manipulation.
In 2024 year-to-date (YTD), SME IPOs have raised ₹8,288 crore, the highest so far. Before this, these IPOs raised ₹4,967 crore in 2023 and ₹1,995 crore in 2022.
Trivesh D further noted that the growing prevalence of SME IPOs highlights their increasing popularity among companies looking to go public. Data shows that SME IPOs have delivered significant returns, with the median listing-day returns standing at 34.43% and a YTD median return of 33.09%. In comparison, mainboard IPOs posted a mean listing-day gain of 23% and a YTD gain of 25%. This robust performance has caught the attention of high-net-worth investors (HNIs), who are optimistic about short-term returns but they may be overestimating the stability of these gains, according to Trivesh D.
Trivesh D also pointed out that SMEs have transformed listing, with promoters initially focusing on short-term gains but gradually shifting towards a more corporate outlook. This transformation has been particularly noticeable as younger generations and former employees have assumed larger management roles, bringing a more strategic approach to operations. However, as much as this corporate shift has improved the overall operation of many SME companies, Trivesh D cautions that these stocks still pose significant risks for investors.
While SME stocks may appear to offer impressive returns, Trivesh D emphasises that they come with inherent volatility. Gains in these stocks can often mask weak fundamentals. He cites examples like Varanium Cloud, whose share price skyrocketed from ₹40 to ₹373, only to fall to ₹15, and Rachana Infrastructure, which saw its stock rise from ₹184 to ₹1,250 before plummeting to ₹84. These kinds of fluctuations highlight the high-risk nature of investing in SMEs, particularly for those who buy into these stocks at inflated prices, hoping for sustained growth.
The BSE SME IPO Index, which tracks the performance of SMEs on the BSE SME Platform, experienced a 171% rally in the last year, but by September 2024, it had fallen 13% in October while the broader index only declined by 2%. Trivesh D stated that this stark contrast indicates the risk-reward dynamic at play with SMEs. Regulatory bodies like SEBI have raised concerns about price manipulation, with reports of misuse of public funds in certain cases. Trivesh D suggested that this highlights the need for stronger regulatory measures to curb such practices and protect investor interests.
Trivesh D also warned of a potential bubble in the SME IPO market, particularly with the rise of pump-and-dump schemes, where stock prices are artificially inflated through misleading information before insiders offload their shares, causing prices to crash. This deceptive practice can leave retail investors holding depreciating assets. He also notes that many SME IPOs have posted impressive listing-day gains, but these gains are often not backed by strong fundamentals, making it crucial for investors to carefully monitor promoters' holdings post-listing to gauge a stock's stability.
The SME IPO Index’s performance raises further concerns, Trivesh D notes, as it surged from around 1400 in January 2021 to an astronomical 106,251 by November 2024, marking a staggering 154% increase in one year. This sharp rise far outpaces the 42% rise in the Mainboard IPO Index, suggesting that the SME IPO segment might be overheating. Trivesh D highlighted that such rapid growth is atypical in a healthy market and indicates a need for caution.
Moreover, Trivesh D pointed out that the sharp price rises in SME stocks are often not supported by consistent profit growth or solid business models. Many of these companies lack the steady earnings and robust financial fundamentals needed to justify their high valuations. This, coupled with high price-to-earnings (PE) ratios without corresponding profit growth, raises red flags about the sustainability of these stocks and their vulnerability to corrections.
Trivesh D also highlighted the occurrence of collusion in some SME IPOs, where promoters and operators have allegedly manipulated stock prices. He cites the example of ‘Add-Shop E-Retail,’ which faced allegations of inflated sales between affiliated companies to boost its stock price. Such practices undermine market integrity and can lead to significant losses for retail investors, Trivesh D warns.
Pre-IPO allotments to operator entities have also been identified as a factor distorting market dynamics. Trivesh D explained that these allotments can create artificial demand and supply imbalances, making it difficult for retail investors to gauge the true value of these stocks. Consequently, investors may find themselves at a disadvantage, caught in the hype created by operators who have inside knowledge of the stock’s prospects.
Despite the risks associated with SME IPOs, Trivesh D advised discerning investors to focus on companies with strong financials, clear growth prospects, and solid governance. He believes that India’s SME sector holds significant long-term growth potential, and for those willing to navigate the volatility, the current market dip could present opportunities to acquire quality SME stocks at attractive valuations. However, he also cautions investors to keep in mind that SME stocks tend to lack liquidity, which can lead to higher costs when exiting positions.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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