The Indian Small and Medium Enterprise (SME) market is experiencing a surge in Initial Public Offerings (IPOs) - 100 SME IPOs in the last 6 months, attracting significant investor interest and generating impressive returns. This article explores the current state of the BSE and NSE SME segments, highlighting key trends and performance indicators.

When did it all start?

The BSE SME platform was launched by the Bombay Stock Exchange (BSE) on March 13, 2012. This platform was specifically designed to facilitate the listing and trading of shares of small and medium-sized enterprises in India. Similar to the BSE SME platform, NSE Emerge was launched by the National Stock Exchange (NSE) on September 18, 2012 to support the growth and development of SMEs .

Objectives of BSE SME and NSE Emerge Platforms

• Access to Capital: Facilitate easier access to equity financing for SMEs to support growth, expansion, product development, and working capital needs.

• Enhanced Visibility and Credibility: Increase the visibility and credibility of SMEs, attracting partners, and customers through listing on a reputed exchange.

• Liquidity for Shares: Provide a mechanism for the trading of SME shares, offering liquidity to investors including promoters

• Corporate Governance and Compliance: Improve corporate governance standards and business transparency by adhering to the listing requirements and regulatory standards of the platforms.

• Investor Confidence: Build investor confidence in the SME sector by providing a regulated and transparent trading environment.

• Growth and Expansion: Support the overall growth and expansion of SMEs, contributing to the development of the SME sector.

A Flourishing Landscape

As of date, 324 companies are listed on the BSE SME platform, with a combined market capitalization of INR. 57,750 Cr. The platform has seen a total of 509 companies listed since its inception, raising a total of INR 6,750 Cr.. Notably, 185 companies have successfully migrated to the main board, demonstrating the potential for growth within the SME sector. The NSE SME segment has also witnessed substantial growth, with 322 companies listed to date.

Attractive Returns for Investors

The BSE SME IPO index has delivered exceptional returns to investors, showcasing the potential for strong growth and value creation:

• 5 Year Return: 5,190%

• 1 Year Return: 263%

• Year-to-Date (YTD) Return: 99%

• Since Inception Return: 92,247%

Recent Trends

Increased IPO Activity: In 2024 alone, 130 companies have gone public, a remarkable 76% of these being SME listings. This signifies a growing trend of SMEs seeking capital through IPOs.

High Subscription Rates: Over 57% of the 99 SME IPOs in 2024 saw subscription rates exceeding 100%, highlighting the strong investor appetite for these offerings. Companies like HOAC Foods India (1834 times) and Kay Cee Energy & Infra (959 times) garnered exceptional interest.

Top Performers: Several SME IPOs have delivered phenomenal returns to investors, with Owais Metal and Mineral Processing standing out with a 1348% gain from its issue price. Other notable performers include Australian Premium Solar, Alpex Solar, and Pratham EPC Projects

Underperformers: While the majority of SME IPOs have performed well, a few have struggled, such as MVK Agro Food Product which is currently trading 63.6% below its IPO price.

Mainboard Migration Guidelines

Last year, the BSE implemented new guidelines for SME companies seeking migration to the main board, aimed at ensuring higher quality and greater investor protection. Key requirements include:

• Net Worth: A minimum net worth of INR 15 Cr. in the preceding two financial years.

• Listing Period: A minimum listing period of three years on the SME platform.

• Public Shareholders: A minimum of 250 public shareholders.

• Profitability: Positive operating profit for at least two out of three financial years and positive profit after tax (PAT) in the immediate financial year preceding the migration application.

Risks involved when investing in the SME segment

• Limited Availability of Information: Financial data and general information for SME companies are released on the NSE/BSE exchange semi-annually. This infrequent disclosure presents challenges for investors. As the lack of comprehensive, up-to-date details affects in-depth company analysis and leads to speculative investments in the space.

• Lower Liquidity:   Minimum traded lot sizes are set by the SME exchanges on a half yearly basis resulting in a higher investment commitment requirement from investors.  Daily liquidity is also relatively less than mainboard stocks due to lower overall investor interest. This leads to higher bid-ask spreads.

• Fewer Disclosures: The companies listed under the SME segment are subject to fewer compliances and disclosures. This can lead to short-term manipulation and accounting fraud.

• Oversubscription and Overvaluation: 90% of the SME IPOs listed in 2024 were oversubscribed by more than 2 times and 10% were oversubscribed by over 50 times. This FOMO leads to the SME listing at unjustified premiums over IPO price and therefore overvaluation of some companies.

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Disclaimer:

Mool Capital Limited is a SEBI Registered Research Analyst having registration no. INH000012449. This report has been prepared by Mool Capital Pvt. Ltd. and is solely for information of the recipient only. The report must not be used as a singular basis of any investment decision. The views herein are of a general nature and do not consider the risk appetite or the particular circumstances of an individual investor; readers are requested to take professional advice before investing. This document is not, and should not, be construed as an offer or solicitation of an offer, to buy or sell any securities or other financial instruments. This report should not be construed as an invitation or solicitation to do business with Mool Capital. Mool Capital and its affiliated company(ies), their directors and employees may; (a) from time to time, have a long or short position in, and buy or sell the securities of the company(ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.