SME stocks tumble as sentiment sours
More than half of the small and medium enterprise (SME) stocks that have listed since 2017 are trading in the red, despite the euphoria surrounding their public floats.
These stocks have fared worse than their mid- and small-cap counterparts listed on the main board of exchanges.
An analysis of the median returns of 178 SME stocks shows a dip of 9 per cent over the past three months and 19 per cent year-todate. Only stocks with an issue size of ~250 million or less were taken into consideration.
In comparison, the BSE MidCap index declined seven per cent and 13 per cent, while the BSE SmallCap index slipped nine per cent and 15 per cent, respectively, over the same periods.
The turnaround in sentiment has also impacted the subscription numbers of some of the recently listed SMEs, with the number of issues subscribed over five times declining over the past three quarters.
Despite the possibility of high returns, experts said there was also a high probability of losing substantial capital in SME stocks. Analysing these firms can be a challenge, as these are not tracked by analysts and there is not much information in the public SME stocks that have fallen the most domain. This means investors are left to themselves when it comes to assessing the fundamentals and gauging the credibility of promoters.
“The smaller the market capitalisation (m-cap), the greater the risk, as large investors typically stay away from these stocks,” said G Chokkalingam, founder, Equinomics Research & Advisory. “Many of these stocks may have entered bubble territory and corrected. Considering the thin liquidity and low volumes, exiting such stocks might be painful, as investors could have to sell at a Year-to-date 3-month (% returns) much lower price.”
The SME segment has been grappling with issues such as lack of liquidity and lacklustre institutional participation. According to experts, the need is to bring in 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.
Institutional participation improved somewhat in 2017-18. For instance, HSBC MF invested in South West Pinnacle Exploration, One Point One Solutions and Worth Peripherals. Sundaram MF invested in Jash Engineering and DSP BlackRock MF in South West Pinnacle Exploration.
The past financial year was the best for public share sales of SMEs. Individual investors, lured by past returns, flocked to these offerings. The SME platform witnessed 148 offerings, mopping up ~21.55 billion, higher than the combined amount raised in the previous six years. The total number of SME issues from 2012 is 419.
East India Securities and Zota Healthcare were the biggest offers in FY18, with issue sizes of ~920 million and ~585 million, respectively. Geographically, the highest number of SMEs listed were from Gujarat (51), followed by Maharashtra (43), Madhya Pradesh (13) and Delhi (10).
The BSE and the National Stock Exchange had launched separate SME platforms in 2012 and 2013, after the Securities and Exchange Board of India came out with easier listing and disclosure guidelines to help small companies tap the capital market.
Besides improved transparency, an Initial Public Offering route for SMEs reduces their dependence on debt financing and helps them maintain the debt-equity ratio efficiently, said experts. Listed SMEs with good ratings are able to get loans at lower interest rates than the market.