Mumbai: Power, banks and utilities may have given more than 20% returns last year even though the Sensex gained just over 4%. Now look at the returns given by an index which is lower in the pecking order than small-caps and even micro-caps. The NSE SME Emerge index — which captures the vibrancy of small and medium enterprises (SMEs) on the bourse — has surged a little over 69% in 2022.
A similar trend is seen on the BSE where its SME IPO index generated a 42% gain. The eye-popping returns among SME stocks is a sign of increasing investor interest in these companies. However, such strong performance mostly pales in comparison to the overall investor interest that stocks listed on the main board of the exchanges attract.
Consider this: In mid-December, the IPO for Droneacharya Aerial Innovations, a Bengaluru-based SME, was subscribed 262 times, leading to a book size of a little over Rs 6,000 crore. Against this, the combined demand size of two other main board IPOs that had opened during the same time was about half of Droneacharya’s.
The IPO for the Bengaluru-based drone specialist, listed on the BSE, was not an outlier. Recently, two more SMEs recorded huge subscription numbers — Phantom Digital Effects was subscribed 234 times, while Annapurna Swadisht was subscribed 190 times. Both these companies are listed on the NSE’s Emerge platform.
According to Santosh Pandey, president & head (professional clients group) at Nuvama (formerly Edelweiss Broking), there are at least two reasons for the strong investor interest in SME stocks now. “For one, since last April, the funding limit for main board IPOs has been restricted to Rs 1 crore per person per offer. This move has acted as a check on excessive rush for main board IPOs. And hence, it has created a level playing field for all the investors. Some investors are now looking at investing in SME IPOs. Second, most mid- and small-cap stocks are fully valued, while SMEs are attractively valued. This, in turn, is attracting investor interest.
To the advantage of SMEs, several high-profile main board listings in the last 15 months have destroyed huge investor wealth. Most of these IPOs — like LIC, Paytm, Nykaa and some others — were offers for sale (OFSs), either partially or fully. “These OFSs gave an exit to existing investors, while SMEs’ IPOs are aimed at raising growth capital. Hence investors, cautious about investing in IPOs on the main board, are now looking for SMEs that are raising funds for further growth and are backed by good management,” said Kulbhushan Parashar, director at Corporate Capital Venture (CCV). Parashar had led all the three SME IPOs — Droneacharya Aerial Innovations, Phantom Digital Effects and Annapurna Swadisht — that saw record-breaking subscription numbers.
A listing helps promoters of these companies too, an exchange official said. “Once listed, they get visibility. They also get introduced to strict governance norms,” the official said. Over the last 10 years, more than 200 companies that were initially listed on SME platforms of the two bourses have now migrated to the main boards of both. “Further, a listing helps SMEs to offer ESOPs and attract talent,” the official added.
The increased investor interest for SMEs, however, has come after much toil by top officials at the two SME platforms who created awareness about the advantages for these companies to go public and the equity funding ecosystem. “The BSE has organized over 2,600 offline and 300 online seminars along with various industrial, professional and government bodies across the country and met around 37,000 SMEs,” said Ajay Thakur, head of the BSE SME platform. “The BSE has also signed MoUs with various state governments, financial institutions and professional bodies to help SMEs to list.” The competition between the two exchanges has also lowered listing costs. A recent report by ADB noted the BSE’s platform was the most cost-effective one in the world to raise equity funds.
What about investors looking at SME stocks that are inherently a risky bet? “Investors should be careful about investing in SME stocks because not everyone is a prospective winner,” said Pandey of Nuvama. “Only about 1 in 10 SMEs would give strong returns over the long term. A company run by a good promoter and available at an attractive valuation is fair game for investors.”
A similar trend is seen on the BSE where its SME IPO index generated a 42% gain. The eye-popping returns among SME stocks is a sign of increasing investor interest in these companies. However, such strong performance mostly pales in comparison to the overall investor interest that stocks listed on the main board of the exchanges attract.
Consider this: In mid-December, the IPO for Droneacharya Aerial Innovations, a Bengaluru-based SME, was subscribed 262 times, leading to a book size of a little over Rs 6,000 crore. Against this, the combined demand size of two other main board IPOs that had opened during the same time was about half of Droneacharya’s.
The IPO for the Bengaluru-based drone specialist, listed on the BSE, was not an outlier. Recently, two more SMEs recorded huge subscription numbers — Phantom Digital Effects was subscribed 234 times, while Annapurna Swadisht was subscribed 190 times. Both these companies are listed on the NSE’s Emerge platform.
According to Santosh Pandey, president & head (professional clients group) at Nuvama (formerly Edelweiss Broking), there are at least two reasons for the strong investor interest in SME stocks now. “For one, since last April, the funding limit for main board IPOs has been restricted to Rs 1 crore per person per offer. This move has acted as a check on excessive rush for main board IPOs. And hence, it has created a level playing field for all the investors. Some investors are now looking at investing in SME IPOs. Second, most mid- and small-cap stocks are fully valued, while SMEs are attractively valued. This, in turn, is attracting investor interest.
To the advantage of SMEs, several high-profile main board listings in the last 15 months have destroyed huge investor wealth. Most of these IPOs — like LIC, Paytm, Nykaa and some others — were offers for sale (OFSs), either partially or fully. “These OFSs gave an exit to existing investors, while SMEs’ IPOs are aimed at raising growth capital. Hence investors, cautious about investing in IPOs on the main board, are now looking for SMEs that are raising funds for further growth and are backed by good management,” said Kulbhushan Parashar, director at Corporate Capital Venture (CCV). Parashar had led all the three SME IPOs — Droneacharya Aerial Innovations, Phantom Digital Effects and Annapurna Swadisht — that saw record-breaking subscription numbers.
A listing helps promoters of these companies too, an exchange official said. “Once listed, they get visibility. They also get introduced to strict governance norms,” the official said. Over the last 10 years, more than 200 companies that were initially listed on SME platforms of the two bourses have now migrated to the main boards of both. “Further, a listing helps SMEs to offer ESOPs and attract talent,” the official added.
The increased investor interest for SMEs, however, has come after much toil by top officials at the two SME platforms who created awareness about the advantages for these companies to go public and the equity funding ecosystem. “The BSE has organized over 2,600 offline and 300 online seminars along with various industrial, professional and government bodies across the country and met around 37,000 SMEs,” said Ajay Thakur, head of the BSE SME platform. “The BSE has also signed MoUs with various state governments, financial institutions and professional bodies to help SMEs to list.” The competition between the two exchanges has also lowered listing costs. A recent report by ADB noted the BSE’s platform was the most cost-effective one in the world to raise equity funds.
What about investors looking at SME stocks that are inherently a risky bet? “Investors should be careful about investing in SME stocks because not everyone is a prospective winner,” said Pandey of Nuvama. “Only about 1 in 10 SMEs would give strong returns over the long term. A company run by a good promoter and available at an attractive valuation is fair game for investors.”
