SME IPOs: The craziest corner of the bull market is getting crazier

In mathematics, you never understand things, you get used to them, legendary mathematician John von Neumann was fond of saying. He would have been pleased to know the same principle is currently playing out on Dalal Street, where a no-holds-barred bull run is stretching credulity to its limits.

The latest episode features the initial public offering of a two-wheeler dealership that whipped up such a frenzy that you would think Tesla or Nvidia was listing a subsidiary in India.

Resourceful Automobile, founded in 2018, is a dealer of Yamaha two-wheelers that operates as Sawhney Automobiles. It has a grand total of two showrooms with an attached workshop in New Delhi and eight permanent employees.

Its financial statements, as one would expect, are modest.

Revenue from operations came in at ₹18.8 crore during FY23. Profit after tax was ₹41.5 lakh. For the 11 months ended 29 February 2024, revenue was ₹16.5 crore, with a PAT of ₹1.5 crore.

Also Read: Mint Quick Edit | Resourceful IPO: Irrational exuberance?

Resourceful Automobile tapped the BSE’s SME IPO platform from August 22 to August 24 to raise ₹11.9 crore, selling 10,24,800 shares at ₹117 apiece. This translates to an almost 39% stake in the company. To put this in plain English, a run-of-the-mill two-outlet bike dealership in the national capital sought a market valuation of ₹31 crore. Full marks for chutzpah, it must be said.

Confounding all the arm-chair scoffers, the SME IPO was oversubscribed 400 times. The retail portion drew oversubscription of almost 500 times.

Have Indian investors come under the grip of an unexplained collective hallucination? Swastika Investmart Ltd, the lead manager to the issue, does not think so.

“They are on the verge of expanding with two additional showrooms. This planned expansion offers significant growth prospects, which have been factored into the valuation,” Sunil Nyati, managing director at Swastika Investmart, told Mint. “Moreover, as Resourceful Auto is unique in its segment with no direct listed peers for comparison, the valuation is based on a multiple that considers their future potential rather than just their current operations.”

However, he acknowledged that many investors could just be fishing for listing-day gains.

“The application of ASBA (Application Supported by Blocked Amount) guidelines means that investors' funds are only deducted if they receive an allotment, with funds unblocked if they do not. This encourages more investors to apply, as their funds are blocked in their own accounts till the allotment is decided,” he added.

Mental Math

Perhaps reading balance sheets and financial statements is considered a waste of time during a raging bull market. What else can explain the steady rise in this SME IPO’s grey market premium throughout the three-day offer period despite the issue having more red flags than a Communist Party convention in China?

Firstly, out of the net proceeds, the company plans to use about ₹2 crore to open new showrooms. Most of the funds ( ₹4.5 crore) will go to repay debt, followed by working capital requirements ( ₹3.3 crore).

Also Read: Indian companies junk private deals, take the IPO route for higher valuations

Total borrowings on its balance sheet as of 29 February 2024 were ₹9.9 crore, which climbed from ₹7.47 crore in FY23. On top of that, the company had negative cash flow from operations in each of the previous three financial years.

Then, there are the usual corporate governance oddities that are synonymous with family-run businesses. Of the five directors, two are independent while the remaining three are related – CMD Rahul Sawhney, his mother Bindu Sawhney and wife Megha Chawla. (All three are the promoters of the company).

One of the independent directors is described as “a dynamic individual who transitioned from a successful career as a graduate teacher to a passionate and accomplished independent director.” A blazing career arc, if ever there was one.

Resourceful Automobile is not even the most extreme example of SME segment euphoria.

Earlier this month, Gujarat-based Broach Lifecare Hospital listed on the SME platform. The company operates a 25-bed hospital in Bharuch and a 15-bed satellite nursing home in adjoining Ankleshwar town.

Its revenue from operations for FY21 stood at ₹3.7 crore, which dropped to ₹3.4 crore in FY22 and ₹1.8 crore in FY23. Profit for FY21, FY22 and FY23 stood at ₹76.52 lakh, ₹45.91 lakh and ₹13.85 lakh, respectively.

Despite these sobering numbers, the ₹4.02 crore issue was oversubscribed almost 160 times, receiving bids for 24,24,78,000 shares against 15,24,000 offered.

Also Read: The Hyundai Motor IPO: How the valuations took a reality check

Its stock market trajectory, however, has been a lesson to investors. After listing at a premium of 90% against the issue price of ₹25, the shares climbed above the ₹50 mark the next day (August 22), before hitting the lower circuit for three consecutive sessions, trapping retailers.

Experts say two issues are at play in the market. One, a horde of investors is itching to cash in on listing-day gains and not really looking at the long-term fundamentals of businesses. And two, there is a huge demand-supply mismatch in the primary market, resulting in almost every issue getting oversubscribed by a wide margin.

As long as these conditions persist, one can expect this go-go period of market exuberance to continue. As to what can trigger the inevitable unravelling, even a genius like John von Neumann would find it hard to foretell.