Action back in the SME IPO mart, but second line of investors missing

The IPO mart is buzzing again, not only on the mainboard, but also in the SME space. While two companies - IRCTC and Vishwaraj Sugar - hit the mainboard IPO market on Monday, four IPOs - Gensol Engineering, Goblin India, Tutorials Point India and Sona Hi Sona Jewellers (Gujarat) - opened for subscription on the SME platforms - BSE SME and NSE Emerge. This is in addition to three SMEs - Misquita Engineering, Shiv Aum Steel and Galactico Corporate Services - that closed their respective issues last week. These IPOs got subscribed a humble 1.16 times to 1.64 times.

Analysts say the improved sentiment in the secondary market is positive for SME space, but poor volumes or lack of second line of investors could be worrisome. "The second line of investors is not coming because mainboard stocks are available at cheaper valuations, so those are their first preferences," Ashok Holani, director of Holani Consultant that provides consultancy services to SMEs explains.

Data corroborates Holani's explanation. The BSE SME IPO index is down over 6 per cent year-to-date. In contrast, the BSE mainboard IPO index is up over 22 per cent.

While merchant bankers have managed to get many SME IPOs sail through, low liquidity on the counters has been a headache for secondary market investors.  It is a Catch-22 problem - low volumes due to lack of investor interest and lack of investor due to low volumes.

Mahavir Lunawat, founder, Pantomath Group, a financial advisory firm agrees. Recently, we have seen professionally managed and VC-backed, companies with enhanced governance standards seeking listing on SME exchanges, but much needs to be explored on the supply side.

Out of 40-odd listings this year (data is available for 31), 14 are trading at 10-79 per cent discount to issue price, while only 11 have rallied over 10 per cent against their issue prices.

The another issue with SMEs is the big lot size that rules out the possibility of retail investors nibbling into them. "Every investor has to be a high net-worth individual, as one has to shell out at least Rs 1 lakh to take exposure in SME stocks. That puts a block on the number of people eligible for investing in these companies," Holani says.

Besides, investors coming to SME IPOs typically invest with a short-term view or just to make quick gains by day trading. "SMEs need funds for at least two-three years. So, if you come only for listing gains or with a three to four months horizon, definitely there will be pressure on the stock and it will go downward," Holani explains.

Migration to mainboard

Meanwhile, the performance of SMEs that moved to mainboard hasn't been impressive as well. 69 BSE SME stocks and 18 NSE Emerge stocks have migrated to respective mainboards so far this year. However, Out of 49 BSE SMEs (whose data was available with AceEquity), 32 delivered negative returns and only 14 beat Sensex returns. As a net effect, a whopping Rs 1,628 crore investors' wealth eroded this calendar year in BSE SME stocks, while investors in NSE SME stocks lost Rs 1,100 crore.

Experts say investors need incentives to invest in SMEs. "In order to avoid short-term capital gains tax, investors earlier used to stay invested in SMEs for over a year. Post the levy of long-term capital gains, even that incentive is gone," says Holani.

Meanwhile, the recent cut in the corporate tax is likely to revive business for manufacturing companies, which procure many things from vendors or suppliers in the SME segment. The move may help resolve the tepid demand before SMEs to an extent," says Mahesh Shukla, Founder, PayMe India, a fintech firm that lends to SMEs.

So far, 44 SME IPOs have hit the SME IPO Street (excluding four ongoing issues), raising Rs 612 crore this calendar against 141 issues in 2018, raising Rs 2,287 crore. 

Also read: IRCTC IPO subscribed nearly 5 times on last day, receives bids for over 9 crore shares

Also read: Vishwaraj Sugar Industries IPO subscribed 46% on day 2