Digikore Studios, Inspire Films and Saakshi Medtech are not exactly household names, but they announced themselves to investors last week. Aiming to list on a stock exchange segment earmarked for small and medium enterprises (SME), for which listing conditions are less stringent, they offered their shares to the public for the first time.
Demand was brisk. Their initial public offerings (IPOs) were subscribed 282, 129 and 92 times over, respectively. Stories like these abound among SME IPOs, which are on fire. However, as is the case with all market investments, there is growth and quality, but also also flattery and fads.
Given the scorching interest and gains that SME IPOs have seen in the past two years, there’s much to consider and unpack. The BSE has indices that trace the one-year share performance of IPOs. Between September 2013 and September 2021, the BSE IPO index and the BSE SME IPO index largely mirrored each other. But since then, the latter has broken away. Given that stocks leave these indices after a year, this means successive new entrants in the BSE SME IPO index have posted handsome gains.
The current lot of SME IPOs are not dividend or asset plays – they are growth plays. One measure to assess their listing gains is to also look at their earnings growth or the price-to-earnings (PE) ratio. On historical earnings, the BSE SME IPO index is richly valued. But looking ahead, that valuation measure looks better as the index companies are expected to post high growth. But if that growth doesn’t materialise, the unraveling can be quick and brutal.
Growth winds
There are companies that have closed SME IPOs in the past year that are growing fast. Take one of the three mentioned above, Inspire Films, which is conducting a ₹21-crore IPO. Revenues of this Mumbai-based content creator for TV channels and streaming platforms have surged at an average annual rate of 65% in the last three years to ₹48 crore in 2022-23.
Similar growth buoyancy is seen among the top 10 constituents of the BSE SME IPO index, as on 31 August. While the index had 67 companies, these 10 companies accounted for a 57% weight of the index. Of these 10 companies, five grew their revenues at a compounded annual rate of above 40% for the last two or three years. In other words, they are doubling revenues every two years. But, equally, there are companies in this set that are seeing modest or negative revenue growth.
Different tracks
Discretion is called for with SME IPOs. For one, these IPOs undergo less scrutiny than IPOs on the main board of stock exchanges. Companies wanting to list on the SME board have their offer document vetted by the stock exchange on whose SME board they wish to list, and not the capital market regulator. The bar for them is also lower in terms of size, track record and shareholding.
Despite variances in business performance, the BSE SME IPO index, which captures the top end of these listings, has shown an unabated increase. But break that down, and go deeper in the SME sets, and the picture moderates. On the BSE, a smaller share of IPOs between 2017 and 2023 on the SME board have given positive returns as compared to the main board. Further, barring years like 2020 and 2023, about 40-50% SME IPOs are currently in the red.
Growth and excesses
Yet, there is an ongoing fervour for SME IPOs. One measure of this is the subscription garnered by the likes of Digikore Studios, Inspire Films and Saakshi Medtech. Another measure is that of the 23 IPOs that were open for subscription in the week of 29 September, as many as 18 were on the SME board.
The year 2023 is on course to top 2018 as the best year for SME IPOs. That year saw 141 SME IPOs. As of 28 September, this year has seen 125 SME IPOs close for subscription. The difference is in investor interest. The median subscription level in 2018 was 1.8 times the shares on offer. In 2023, this has rocketed to 25.7 times. There are high-growth companies there. There are also the excesses that tend to breed when the market likes a story.
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