Fundraising through SME IPOs hits all-time high
The year 2017 was the best year for public share sales of small and medium enterprises (SMEs) as individual investors, lured by past returns, flocked to pick up these offerings.
The SME platform witnessed 133 offerings, mopping up ~16,795 million last year, higher than the combined amount raised in the previous five years. The total number of SME issues since 2012 now stand at 332.
The average SME IPO size has risen 1.64 times to ~134.2 million in 2017, from ~81.8 million in the previous year, according to Pantomath Advisory Services Group data.
Euro India Fresh Foods and Zota Health Care were the biggest IPOs, with an issue size of ~512 million and ~585 million, respectively. Geographically, the highest number of SMEs listed are from Gujarat (51), followed by Maharashtra (39), Madhya Pradesh (11), Delhi (8) and Rajasthan (6).
Individual investors betting on such stocks have not been disappointed. Sixty-seven stocks beat Sensex returns of 28 per cent clocked in 2017, while 32 gave returns in excess of 100 per cent. Thirty-nine companies hit the 20 per cent upper circuit limit on the first day of listing.
Shrenik has topped the returns chart with returns of 1,257 per cent. Meera Industries and Airan have given returns of 561 per cent and 457 per cent, respectively.
“The consistent returns on SME stocks over the past five years have increased the confidence among investors towards this segment. We expect a sharp surge in the number of listings in the next three-five years,” said Mahavir Lunawat, managing director at Pantomath Capital Advisors.
State governments are doing their bit to encourage SMEs to list. In 2016, the Gujarat and the Rajasthan governments announced subsidies to pay for the expenses of SMEs going for IPOs. The Gujarat government, for instance, began reimbursing 10 per cent of the IPO expenses of SMEs in the state, subject to a maximum of ~5,00,000 each.
However, the SME segment is grappling with issues, such as lack of liquidity and lacklustre institutional participation. According to experts, the need is to bring in priority investing from big institutional players and tweak the lot size to improve liquidity. The minimum lot size varies between ~0.1 million and ~0.15 million.
But, in 2017, there was a slight improvement in institutional participation. For instance, YES Bank was an investor in One Point One Solutions. HSBC MF invested in One Point One Solutions and Worth Peripherals, while DSP Black-Rock MF invested in Momai Apparels.
Despite the possibility of high returns, experts also highlight the probability of one’s entire capital being wiped out in these companies. Analysing these firms can also be a challenge as they are not tracked by analysts and there is not much information in the public domain. This means investors are left to themselves when it comes to assessing the fundamentals and gauging the credibility of the promoters.
Besides improved transparency, an IPO route for SMEs reduces their dependence on debt financing and helps them maintain their debt-equity ratio efficiently, say experts. Listed SMEs with good ratings are able to get loans at lower interest rates than the market.