Thomas P Abraham

A slew of SME IPOs has been attracting much investor attention of late due to healthy returns delivered by some of these companies. Hem Securities has managed 50 of these SME IPOs. Prateek Jain, Director, shares his views on the SME IPO market with BusinessLine . Excerpts:

In the last two-to-three years, a record number companies have entered the SME IPO market. How is the SME IPO market shaping up?

The SME IPO market is shaping up well. A record 380 companies entered the market, raising close to ₹4,000 crore in financial year 2018, compared to just 20 companies raising ₹200 crore five years back. In the last few years, the face of investors in the SME IPO market has completely changed.

The market, earlier dominated by retail investors, is now seeing a great deal of investing interest from domestic fund houses, institutions, private wealth management offices and high networth investors. With increased investor awareness, higher returns and improving liquidity, SME IPOs have become an attractive investment destination to deploy funds.

Fiscal 2018 also witnessed tremendous response from investors in terms of subscriptions, with nine IPOs getting subscribed more than 100 times the issue size.

Do you expect the boom in SME IPOs to continue?

We believe the boom in the SME IPO space has just begun, and we will be seeing many blockbuster IPOs in the coming months. We will not be surprised to see at least 15-to-18 IPOs every month this financial year. About 50 companies have filed their offer documents with the regulator. India is a land of SMEs. With the government’s emphasis on the development of SMEs, we are going to see an increasing number of SME IPOs in the coming times.

What has been the performance of these companies post listing?

The BSE-SME IPO index is trading at almost 20 times its base level of 100; we have seen similar returns in the NSE Emerge index as well. In the last one year, the SME indices of the BSE and the NSE have given returns of over 60 per cent, whereas the benchmarks NSE Nifty and Sensex have given returns of only about 15 per cent.

So, from the point of view of index performance, the SME space has outperformed the broader markets in the last one year.

A large number of companies listed on the SME board has expanded their operations and given year-on-year growth in revenues and net profit.

While investing in the SME space, one needs to have an eye to identify a good stock.

Liquidity, however, continues to remain an issue in SME trading. What measures could regulators take to improve the situation?

Liquidity is fast improving in the SME space. As we are seeing larger participation from investors in IPOs, liquidity post-listing is also increasing at a fast pace. Moreover, liquidity is also related to the size of the IPO — in bigger IPOs in the SME space, we have seen very good liquidity, post listing as well. On account of compulsory market-making, liquidity is already addressed to a large extent.

We feel, reducing the lot size may encourage more investors to participate in the SME space, which may lead to improved liquidity.

What’s attracting big investors to SME IPOs?

Two major reasons that are attracting big investors to the SME space are attractive valuations and the potential to grow multi-fold because of the low base effect. At present, the Mid-Cap and Small-Cap indices are trading at very high PE multiples, and generally SME IPOs are offered at attractive multiples compared to their industry peers, which is attracting investors to invest in these companies. Moreover, unlike in main-board IPOs, in the SME space, majority of the IPOs are fresh issues and not offer-for-sale, as a result of which the funds raised through the IPOs flow into the company which helps in the expansion of business.

Interestingly, the treasury department of some banks have started looking at this market. Also, portfolio managers and family offices have started looking at this market more seriously.

Do SME IPOs help promoters resolve their liquidity problem and grow their business?

The growing SME capital market has addressed several myths and lent a lot more of confidence to growing entrepreneurs. Fund-raising through SME IPOs makes it possible for promoters and companies to execute their capex plans through equity issuance, rather than leveraging their balance sheet with huge debt, which in turn dampens profitability due to high interest cost. Listing at the SME platforms also provides the companies enhanced visibility and credibility among its customers or competitors.

In the last five years, how many IPOs has Hem Securities managed? What are your future plans?

As a merchant banker, we have listed almost 50 companies on the SME space in the past few years. We were among the first to take part in the SME space. Besides, we have experience of over three decades in the financial markets. We plan to capitalise on our expertise in this field and emerge as the single-largest merchant banker in the SME space.

We have filed an offer document with SEBI for a main board IPO in the telecom-infra space and are running a few more mandates on the main board space which we plan to close this financial year.

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