The surge in investor interest in SME IPOs is becoming one of the most significant trends in the financial markets this year. Driven by the allure of high returns and the opportunity to participate in the early growth stages of these companies, investors are flocking to these offerings in unprecedented numbers.
The fervour surrounding SME IPOs reflects a broader shift in the investment landscape. Retail and institutional investors alike are diversifying their portfolios by betting on the next wave of industry leaders.
Unlike traditional large-cap IPOs, which often attract more conservative investors, SME IPOs are drawing those with a higher risk appetite, eager to capitalise on the rapid growth potential that these companies offer.
However, irrespective of the underlying business models and fundamentals of these IPOs, they have been receiving an overwhelming amount of interest from investors. This trend has sparked significant debate among market experts, who are increasingly questioning the sustainability of such enthusiasm.
The fact that investors are flocking to these offerings without a thorough evaluation of the companies' long-term prospects raises concerns about the potential for a speculative bubble. Experts are particularly worried that the current frenzy might be driven more by a herd mentality and the lure of quick profits rather than a sound assessment of the IPOs' true value.
Despite multiple warnings from the market regulator SEBI and the listing cap implemented by the NSE, retail investors continue to flock to SME IPOs. It's becoming increasingly rare to find an SME IPO that isn't fully subscribed in the retail category, with subscription rates in some cases reaching up to 2,000 times in this segment.
Recently, the IPO of Resourceful Automobile made headlines with a staggering 400x subscription rate. The company received bids worth ₹4,000 crore against an offer of just ₹12 crore.
This isn't the first time an SME IPO has seen such overwhelming demand, but market experts were puzzled by the enthusiasm for a company whose business is limited to a Yamaha two-wheeler dealership, operating just two showrooms with a staff of just eight.
In August alone, 25 SME companies debuted on Indian exchanges, successfully raising a combined total of ₹647 crore through their IPOs. The data, compiled by Livemint, revealed the overwhelming investor enthusiasm, with total bids for these IPOs soaring to a staggering ₹1.60 lakh crore.
This surge highlighted the intense appetite among retail investors to participate in this segment, further emphasising the growing allure of SME stocks in the current market landscape.
Some of these IPOs, such as Afcom Holdings, received bids totalling ₹15,000 crore, compared to its issue size of ₹73.8 crore, resulting in a subscription rate of 303 times. Similarly, Positron Energy's IPO attracted bids worth ₹14,132 crore against its issue size of ₹51.2 crore, being subscribed 414 times.
Brace Port Logistics IPO saw an even higher subscription rate. The offering was oversubscribed 657 times, receiving bids worth ₹12,410 crore, according to data from Chittorgarh.com.
Since the 2012 launch of the SME platform on the stock exchanges, the market has seen significant growth, with over ₹14,000 crore raised in the past decade, including approximately ₹6,000 crore in 2023-24, as per the SEBI.
Some experts note that SME IPOs are being launched with hefty valuations. However, retail investors are largely overlooking these figures, focusing instead on the potential profits they can make on listing day. Meanwhile, other investors are choosing to subscribe based on the reputation and track record of the merchant bankers involved.
India's market regulator has raised concerns about questionable practices in the country's small and medium enterprise (SME) market, warning investors about unrealistic projections by some SMEs.
Post-listing, certain entities have been observed engaging in activities that create a misleadingly positive portrayal of their operations. These practices include public announcements and corporate actions such as bonus issues, stock splits, and preferential allotments, often leading to a surge in investor interest and inflated stock prices.
According to SEBI, these actions generate a deceptive sense of optimism among investors, prompting them to purchase securities at elevated prices. This, in turn, provides an advantageous exit strategy for promoters looking to offload their holdings profitably.
Suresh Mansharamani, OKR Expert and Co-Founder at Tajurba Business Network, said IPO valuations were significantly influenced by the market environment. “In a bull market, where investor confidence is high, valuations are positively influenced, and demand for IPOs tends to be stronger,” he said.
He noted that companies in high-growth sectors like technology and pharmaceuticals often command higher valuations due to anticipated future growth, while traditional industries might experience more modest valuations. He added that while merchant bankers typically suggest the final IPO pricing, promoters must ensure that the pricing strikes a balance—not too high to deter retail investors nor too low to undervalue the company.
Discussing market sentiment, Mansharamani highlighted its crucial role in Indian IPO valuations. “The success of recent high-profile IPOs can boost confidence and influence the valuation of upcoming ones. Conversely, if a recent IPO struggles, it can dampen enthusiasm for new offerings,” he said.
He cited examples like Zomato and Paytm to illustrate how sector-specific trends and market conditions can shape IPO valuations. Zomato's high valuation reflects its growth potential in the online food delivery market, and Paytm's valuation was driven by its broad user base and future growth expectations.
On the SME exchange, Mansharamani explained that IPO valuations are typically simpler, usually ranging from 10 to 15 times the profit after tax (PAT) and that the discounted cash flow (DCF) method is generally not applied to SME IPOs.
Disclaimer: The views and recommendations given in this article are those of individual analysts. These do not represent the views of Mint. We advise investors to check with certified experts before taking any investment decisions.
