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Beyond the Hype: A Realistic Look at SME IPOs

Sagar Nishar, Head – Investments at Aarii Ventures
Sagar Nishar, Head – Investments at Aarii Ventures

Have you ever dreamt of unearthing the next big thing? SME IPOs offer a thrilling chance to get in on the ground floor of tomorrow’s market leaders. But tread carefully because this exciting frontier can also be fraught with hidden dangers. Buckle up as we navigate the goldmine potential and minefield risks of SME IPOs!

Understanding SME IPOs

Before diving in, it’s crucial to understand the intricacies of SME listings. SME IPOs cater specifically to Small and Medium-sized Enterprises, offering them a streamlined path to raise capital from the public. Compared to the more stringent requirements of the Mainboard exchange, SME platforms provide a less expensive and less complex listing process, making them ideal for companies in their growth stage.

In fact, nearly 100 companies have already raised a staggering ₹3170 crore through SME IPOs since the beginning of 2024, highlighting the growing potential of this market. However, investor appetite far outstrips this, subscriptions for these very IPOs surpassed a whopping ₹6 lakh crore.

The Allure and the Gamble: Weighing the Risks and Rewards

The recent performance of SME IPOs has been nothing short of phenomenal. The S&P BSE SME IPO index has skyrocketed by 60% in the past 6 months alone and an impressive 195% over the past year. Investors are flocking to this exciting new frontier, fuelled by the promise of high returns.

However, not all that glitters is gold. While some investors in companies like Winsol Engineers and Kay Cee Energy & Infra struck gold with listing gains of a whopping 411% and 343% respectively, others weren’t so fortunate. The stories of M.V.K. Agro Food Products and Italian Edibles serve as sobering reminders, with investors facing losses of 31% and 15% upon listing.

Winsol Engineers and Kay Cee Energy & Infra soared with oversubscription of 682x and 1052x, respectively. But hold on – Italian Edibles, despite a hefty 154x oversubscription, saw listing day losses.  This makes one wonder – Are there any guaranteed correlations between high subscriptions and skyrocketing listing gains?

The GMP Buzz

The unofficial IPO grey market offers a glimpse into investor sentiment before listing. A positive or high Grey Market Premium (GMP) suggests the potential for a strong listing, while a negative GMP indicates caution might be warranted. For example, Winsol Engineer’s IPO’s issue price was ₹75, and the GMP was ₹199, suggesting a potential listing price of ₹274 (a 265% gain).

The Murky Waters: Operator Activity and Regulatory Concerns

While the IPO might seem like a level playing field, a shadow industry of stock operators can muddy the waters. These operators often subscribe to the issue themselves, artificially inflating prices after listing before dumping them on unsuspecting retail investors lured by the initial surge. This “pump and dump” scheme leaves many with near-worthless shares.

Adding to the complexity are concerns raised by SEBI. SEBI chairperson Madhabi Puri Buch recently highlighted potential market manipulation within the SME segment. Additionally, some SME listings lack thorough research but manage to get oversubscribed through heavy marketing hype.

Pre-IPO Frenzy

Pre-IPO investments are gaining popularity as they allow individuals to buy shares of a company before it goes public on the stock exchange. This can be an attractive option because of the potential for high returns, especially if the company experiences a significant stock price increase after its IPO. However, pre-IPO investments are often unregulated and carry a high degree of risk.

Uncovering Gems Beyond the Hype

It’s important to remember that not all SME IPOs are created equal. While there may be instances of artificial demand and price manipulation, the genuine excitement and participation of retail investors is a powerful force. Savvy pre-IPO investors understand the importance of thorough due diligence before taking the plunge. This includes meticulously reviewing the business fundamentals, financials, and future plans.

 “For us, this meticulous approach has paid off handsomely. Through in-depth research and leveraging our extensive network, we’ve identified genuine investment opportunities in promising companies at attractive valuations with P/E multiples being as low as 6x. Navigating the SME IPO landscape requires a critical eye and a healthy dose of skepticism. Our success has come from careful research and strategic investment in high-potential companies, proving that with the right approach, SME IPOs can indeed be a goldmine.”

So, are SME IPOs a goldmine or a minefield? The answer, like most things in the investing world, is “it depends.” But for the intelligent investor armed with knowledge, a critical eye, and a healthy dose of skepticism, the potential for unearthing hidden gems remains very real.

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