Portfolio

SME IPOs pack a punch on the returns front

Kumar Shankar Roy | Updated on September 30, 2021

But these small companies come with a big risk too

In the past year, IPOs such as Happiest Minds, Route Mobile, Angel Broking, Tatva Chintan and Barbeque Nation that have given between 100-700 per cent return since listing have grabbed eyeballs.

But chances are high that you may not have come across BEW Engineering, Shine Fashions, Veer Global, Rangoli Tradecomm, Sigma Solve or EKI Energy Services – SME IPOs that have provided between 200 per cent and 2700 per cent returns.

SME IPOs score

After the Covid crash in March 2020, the domestic IPO market started picking up pace from September 2020 and since then the mainboard has seen as many as 51 IPO listings. Not to be left behind, the SME IPO market has seen 40 public issues. But compared to the size and muscle of mainboard IPOs, the under-researched and diminutive stories on the SME side of Dalal Street have raised only about ₹500 crore, or a little over ₹12 crore on an average. The biggest IPO fundraising was only about ₹100 crore (Aashka Hospitals), while the least raised was around ₹1 crore (Kuberan Global Edu Solutions). SME IPO subscription and trading take place in a lot size of minimum ₹1 lakh. The minimum number of shareholders in SME IPO is 50 and these issues are fully underwritten.

Though SME IPOs lack the huge numbers and marketing blitzkrieg of mainboard peers, they try to make it up with eye-popping returns if last one year data is anything to go by. For instance, carbon credit management firm EKI Energy stock that was available for ₹102 in its ₹19-crore IPO in April this year sports a tag of ₹2,900 today, a whopping rise of 2743 per cent. EKI is not alone.

IT and ITeS company Sigma Solve has advanced 620 per cent since its SME IPO listing in October last year. Rangoli Tradecomm’s IPO returns so far have been 409 per cent. Such fantastic gains also mean that just like on the mainboard, these SME IPO stars carry premium valuation multiple (50 to 400 times). But talking about the massive gains will only be half the story told.

High risk

Typical of high-risk high-return bets that SME IPOs essentially are, as many as 40 per cent listings have slipped below issue price. That compares poorly with mainboard IPOs where only 16 per cent listings trade below issue price in the last one year.

Overall, in the last 12 months, seven SME IPO stocks (17.5 per cent) have more than doubled investor money, three stocks (7.5 per cent) have generated between 25-75 per cent gain, and 14 stocks (35 per cent) have given up to 25 per cent rise.

However, investment in 16 stocks (40 per cent) such as ADJIA Technologies, Aashka Hospitals, AA Plus Tradelink and Ashapuri Gold Ornament has been money-losing exercise for investors who have held on to the stocks. Poor trading volumes (often in thousands of shares), narrow investor participation and under-researched businesses mean that exits can be costly when an SME IPO story goes awry.

Hard to ignore?

That said, the presence of long-term wealth builders make these stocks hard to ignore. Over the years, SME IPO stocks such Suumaya Lifestyle (up 2800 per cent), Share India Securities (up 1470 per cent), Shree Ganesh Remedies (up 1035 per cent), Manorama Industries (up 713 per cent), Yasho Industries (up 660 per cent), D P Abhushan (up 650 per cent) and Ganga Forging (up 630 per cent) have proven to be stable wealth generators.

The intent of SME platforms is to help young companies blossom into full-fledged companies. In due time, this also enables them to migrate into the main board as per the existing rules and regulations. For instance, 114 companies have migrated to the main board as per BSE.

However, it is easy to understand why the vote of confidence is weak in case of SME IPOs.

Given the small size of the companies, these businesses can be disrupted sooner. The biggest revenue generators here sport annual sales of about ₹100-150 crore while their yearly profits are between ₹5-10 crore. In fact, more than 50 per cent of SME IPOs that have hit the market within the last one year have less than ₹1 crore in bottom-line, making them highly vulnerable.

 

Published on September 25, 2021

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