SME IPOs

In recent times, despite global challenges faced by the Indian stock markets, several small businesses that recently went public in 2023 have shown impressive performance. These companies have witnessed significant growth, with their shares more than doubling in value.

Small and Medium Enterprises (SMEs) have raised around Rs 930 crore through 49 offerings, which is nearly nine times the amount raised by five mainboard IPOs, totaling approximately Rs 5,824 crore. Many SME IPOs have attracted oversubscription due to listing at a substantial premium above the issue price. Although there are inherent risks associated with this segment, investors with a high appetite for risk, especially high net worth individuals (HNIs), have eagerly participated, having previously gained from similar IPOs.

Out of the 49 SME IPOs, 33 companies are trading above their issue price. For example, Macfos Ltd, which went public in March 2023 through a Rs 22.55-crore IPO, has seen a remarkable 210% increase from its issue price of Rs 102 per share. Similarly, Quicktouch Technologies Ltd, listed in April 2023 after a Rs 8.86 crore share sale, has surged over 175% from its issue price of Rs 61 per share. Other companies such as Lead Reclaim & Rubber Products Ltd, Exhicon Events Media Solutions Ltd, MCon Rasayan India Ltd, Quality Foils India Ltd, Infinium Pharmachem Ltd, Innokaiz India Ltd, and Srivasavi Adhesive Tapes Ltd have also experienced gains of over 100% from their issue price.

However, it is important to remain cautious as the limited free float and small market capitalization of these companies can make their stock prices susceptible to manipulation. Some promoters may collaborate with investors to artificially inflate prices. Genuine companies with decent promoters attract oversubscription due to their smaller size, but vigilance is necessary. The presence of a vibrant grey market further influences these dynamics.

In 2022, approximately 109 SME firms went public, raising about Rs 1,875 crore through IPOs. In comparison, 59 SME firms were listed in 2021, raising a total of Rs 746 crore.

While the short-term returns may be significant, analysts urge caution as the sentiment surrounding these offerings can quickly change. Disappointing listings can erode investor confidence. Investing in these businesses carries a substantial level of risk due to limited operational presence and challenges in evaluating prospects, promoters’ quality, and corporate governance.

Investors should be aware that the minimum investment amount for SME IPOs is significantly higher, around Rs 1 lakh, compared to regular IPOs, which require approximately Rs 15,000. Additionally, while SME IPOs may initially experience high liquidity and trading volumes, they tend to decline over time.

Several companies have shown significant gains since listing, although their latest earnings have not been reported. Macfos Ltd witnessed a remarkable 104% year-on-year increase in revenue in FY22, reaching Rs 55.51 crore, along with a net profit increase of 280% to Rs 6 crore. Quicktouch Technologies reported a substantial 250% surge in revenue to Rs 25.45 crore, accompanied by a net profit increase of over 317% to Rs 2.21 crore. MCon Rasayan India Ltd announced a noteworthy 114% rise in revenue, reaching Rs 19.22 crore, with a net profit surge of 131.5% to Rs 0.44 crore. Quality Foils India Ltd saw a 45% increase in revenue to Rs 180 crore, with a net profit advance of 69% to Rs 1.62 crore.

Despite declines since listing, Amanaya Ventures Ltd and AG Universal Ltd exhibited positive financial performance. Amanaya Ventures reported a significant 114% jump in revenue to Rs 13.25 crore, accompanied by a net profit increase of 700% to Rs 0.08 crore. AG Universal experienced an 83% increase in revenue to Rs 70.46 crore and a net profit jump of 373% to Rs 0.71 crore.

Investors should carefully evaluate these SMEs, considering the risks involved and conducting thorough assessments of their prospects, promoters, and corporate governance.