Are SME IPOs moving towards bubble territory?

1 Apr 2024 , 10:05 AM

WHY SEBI IS WORRIED ABOUT THE SME IPOs?

In the last couple of months, SEBI members have continuously expressed reservations about the rapidly growing interest in the SME IPOs. The idea of a separate segment for SME IPOs on the NSE and the BSE has been around for some time, but has emerged as a distinct asset class only in the last 2-3 years. However, in the last 2 years, the growth of the SME IPOs in terms of retail investor participation, returns on these IPOs and the oversubscription levels have made it a distinct and lucrative asset class for investors. Obviously, SEBI does not want the retail investors to burn their fingers in this new product and is trying to caution them. In fact, SEBI is cautious about the bubble in smaller stocks overall, but SME is representative.

For instance, SEBI has used a mix of moral suasion and regulation to bring down the risk of a small cap and SME bubble. SEBI has asked mutual fund AMCs to go slow on collections and NFO flows into small cap funds, where liquidity is a major issue. Secondly, it has also prescribed stress tests every 15 days for small cap and mid-cap funds, which would underline how many days it would take to liquidate half the portfolio. Recent revelations have been rather scary. In addition, SEBI has also used regulation through the imposition of additional special margins (ASM) as well as 100% upfront margins in special cases to reduce the speculative content in the SME and the small cap segment.

This is a vast subject and so the best we will do is to use a couple of proxies. At one level, we will use the extent of oversubscription of SME IPOs in the last 3 calendar years i.e., 2022, 2023 and the first quarter of 2024. At the second level, we will look at the range of returns generated by the SME IPOs in each year, with focus on the top-10 and bottom-10 and the average returns and the standard deviation of returns generated by the SME IPOs. Since SME IPOs have emerged as a distinct asset class, we are using the SME IPOs over the years as a proxy to look at the concerns raised by SEBI. We consider NSE and BSE SME IPOs.

SME IPO SUBSCRIPTIONS – TOP 10 OVER THE LAST 3 YEARS

Let us start by looking at the SME IPOs that got the best subscription in the IPO in each of the years. Obviously, we are looking at the full years of 2022 and 2023, but only the first quarter of 2024 that has already elapsed. Here is a quick look at the SME IPOs of 2022 with the top-10 ranked in terms of subscription ratio.

Company Name (2022 SME IPOs)	Issue Size (₹ Cr)	QIB (x)	NII (x)	Retail (x)	Total (x)
Olatech Solutions Limited	1.89	0.00	517.71	679.94	598.82
Arham Technologies Limited	9.58	0.00	418.27	481.79	450.03
Baheti Recycling Industries Limited	12.42	0.00	259.21	435.65	347.53
AMBO Agritec Ltd	10.20	0.00	323.51	350.00	336.75
Veekayem Fashion and Apparels Limited	4.44	0.00	355.85	247.09	301.47
Ameya Precision Engineers Ltd	7.14	0.00	259.16	243.53	251.35
Droneacharya Aerial Innovations Limited	33.97	0.00	287.80	330.82	243.70
Arihant Academy Limited	14.72	0.00	242.89	228.85	235.87
Amiable Logistics (India) Limited	4.37	0.00	186.03	281.98	234.00
PNGS Gargi Fashion Jewellery Limited	7.80	0.00	213.21	248.68	230.94

Data Source: NSE & BSE

As can be seen in the above data, the subscriptions have been quite robust in the year 2022 for the SME IPOs. For the year 2022, the average subscription of the top-10 most subscribed SME IPOs stood at 323.05 times. Within the overall subscription, the retail portion got subscribed 352.83 times on an average while the HNI / NII portion got subscribed by 306.36 times on an average. QIB investors were almost absent in the year 2022. The top 10 IPOs in terms of subscription collected ₹106.53 Crore, or an average of ₹10.65 Crore per IPO. The total IPO interest received was to the tune of ₹30,902 Crore.

Let us now turn to the SME IPOs of calendar year 2023 with the top-10 ranked in terms of subscription ratio.

Company Name (2023 SME IPOs)	Issue Size (₹ Cr)	QIB (x)	NII (x)	Retail (x)	Total (x)
Trident Techlabs Limited	16.03	117.91	854.37	1,059.43	763.30
Kahan Packaging Limited	5.76	0.00	405.59	1,042.37	730.45
Net Avenue Technologies Limited	10.25	61.99	616.25	721.89	511.21
Benchmark Computer Solutions Limited	12.24	0.00	357.89	590.26	484.49
Srivari Spices and Foods Limited	9.00	79.10	786.11	517.95	450.03
Maitreya Medicare Limited	14.89	85.41	744.03	509.40	446.79
Madhusudan Masala Limited	23.80	86.91	574.08	592.73	444.27
Anlon Technology Solutions Limited	15.00	54.53	883.58	447.06	428.62
Deepak Chemtex Limited	23.04	96.80	642.25	475.36	403.03
Siyaram Recycling Industries Limited	22.96	96.43	597.72	459.11	385.19

Data Source: NSE & BSE

How did the SME IPO subscription story change in 2023? As can be seen in the above data, the subscriptions have been much stronger for the top 10 SME IPOs in year 2023. For the year 2023, the average subscription of the top-10 most subscribed SME IPOs stood at 504.74 times. Within the overall subscription, the retail portion got subscribed 641.56 times on an average while the HNI / NII portion got subscribed by 646.19 times on an average. The QIB portion got subscribed 67.91 times on an average. The top 10 IPOs in terms of subscription collected ₹152.97 Crore, or an average of ₹15.30 Crore per IPO. The total IPO interest received was to the tune of ₹73,449 Crore.

Let us finally turn to the SME IPOs of calendar year 2024 with the top-10 ranked in terms of subscription ratio. This only pertains to the SME IPOs in first quarter of 2024.

Company Name (2024 SME IPOs)	Issue Size (₹ Cr)	QIB (x)	NII (x)	Retail (x)	Total (x)
Kay Cee Energy & Infra Limited	15.93	127.71	1,668.97	1,311.10	1,052.45
Maxposure Limited	20.26	162.35	1,947.55	1,034.23	987.47
Koura Fine Diamond Jewelry Limited	5.50	0.00	373.66	1,083.98	733.01
Signoria Creation Limited	9.28	107.56	1,290.56	649.88	666.32
Fonebox Retail Limited	20.37	138.69	819.99	886.32	659.42
Esconet Technologies Limited	28.22	156.02	868.05	553.02	507.24
Australian Premium Solar (India) Limited	28.08	107.02	772.87	535.77	464.19
Purv Flexipack Limited	40.21	157.32	690.72	448.73	421.78
Kaushalya Logistics Limited	36.60	92.62	847.88	375.44	390.88
New Swan MultiTech Limited	33.11	110.69	739.72	388.23	384.26

Data Source: NSE & BSE

How did the SME IPO subscription story change in the first quarter of 2024? As can be seen in the above data, the subscriptions have been robust for the top 10 SME IPOs in year 2023. For the year 2023, the average subscription of the top-10 most subscribed SME IPOs stood at 626.70 times. Within the overall subscription, the retail portion got subscribed 726.67 times on an average while the HNI / NII portion got subscribed by 1.002 times on an average. The QIB portion got subscribed 116 times on an average.  The top 10 IPOs in terms of subscription collected ₹237.56 Crore, or an average of ₹23.76 Crore per IPO. The total IPO interest received was to the tune of ₹1,31,757 Crore.

What are the immediate thoughts here? Clearly, there is some justification in what SEBI is saying. It looks like the SME IPOs have seen a surge in the amounts collected, the average subscription across retail and HNI / NII, as well as the total amount of money committed. In fact, the total amount committed in 2023 and 2024 have doubled over the previous year. While it may still be early to call it a bubble, it surely warrants caution. However, to understand the caution story, let us also look at the best and worst performers among the SME IPOs in the last 3 years.

BEST AND WORST RETURNS ON SME IPOS IN YEAR 2022

The table below captures the best and worst returns on IPOs in year 2022. We will look at absolute returns across the board, which may not be very indicative but will surely be illustrative. Let us first look at the 2022 SME IPOs that have given the best positive returns till date in terms of absolute point to point returns.

Company Name (SME IPOs 2022)	Listing Day Gain/Loss	Current Gain/Loss
Insolation Energy Limited	110.26%	4210.26%
PNGS Gargi Fashion Jewellery Limited	99.50%	1675.33%
Cool Caps Industries Limited	-0.92%	1071.05%
Concord Control Systems Limited	109.82%	1025.45%
Veekayem Fashion and Apparels Limited	78.57%	830.71%
Krishna Defence and Allied Industries Limited	101.92%	805.26%
Jay Jalaram Technologies Ltd	45.83%	777.50%
AB Cotspin India Limited	15.43%	598.29%
Empyrean Cashews Limited	19.19%	578.38%
Agni Green Power Limited	162.50%	487.00%

Data Source: NSE & BSE

The above returns are based on the best performing SME IPOs of 2022 till date in terms of absolute point to returns. Let us quickly turn to the losers.

Company Name (SME IPOs 2022)	Listing Day Gain/Loss	Current Gain/Loss
Veerkrupa Jewellers Limited	-5.00%	-95.41%
Rhetan TMT Limited	-5.00%	-88.07%
Pace E-Commerce Ventures Limited	6.50%	-83.88%
Dipna Pharmachem Limited	-12.11%	-75.21%
Ishan International Limited	3.50%	-75.00%
Maagh Advertising And Marketing Services Ltd	9.00%	-74.42%
Global Longlife Hospital and Research Limited	-3.32%	-72.11%
Rachana Infrastructure Limited	2.63%	-70.11%
Evoq Remedies Limited	-12.04%	-67.89%
Dhyaani Tile And Marblez Limited	7.45%	-63.45%

Data Source: NSE & BSE

The above returns are based on the worst performing SME IPOs of 2022 till date in terms of absolute point to returns. What are the major takeaways from the 2022 numbers?

There were a total of 109 SME IPOs in the year 2022 and the average returns of these 109 IPOs across the board on an arithmetic average basis was an impressive 174.53%. Out of the 109 IPOs, a total of 73 IPOs have given positive returns till date while a total of 36 IPOs have given negative returns till date. The risk adjusted returns for 2022 SME IPOs (mean returns divided by the standard deviation of returns) stood at 36.63%.

BEST AND WORST RETURNS ON SME IPOS IN YEAR 2023

The table below captures the best and worst returns on IPOs in year 2023. We will look at absolute returns across the board, which may not be very indicative but will surely be illustrative. Let us first look at the 2023 SME IPOs that have given the best positive returns till date in terms of absolute point to point returns.

Company Name (SME IPOs 2023)	Listing Day Gain/Loss	Current Gain/Loss
RBM Infracon Limited	53.06%	1491.94%
Bondada Engineering Limited	99.49%	1036.20%
Gayatri Rubbers and Chemicals Limited	22.50%	693.67%
Trident Techlabs Limited	194.43%	585.71%
Srivari Spices and Foods Limited	153.69%	576.19%
Meson Valves India Limited	99.46%	556.86%
Oriana Power Limited	168.73%	528.81%
Sahana System Limited	26.78%	528.67%
Kore Digital Limited	6.08%	495.92%
Kody Technolab Limited	11.56%	494.09%

Data Source: NSE & BSE

The above returns are based on the best performing SME IPOs of 2023 till date in terms of absolute point to returns. Let us quickly turn to the losers.

Company Name (SME IPOs 2023)	Listing Day Gain/Loss	Current Gain/Loss
Bizotic Commercial Limited	-2.29%	-73.87%
Patron Exim Limited	-0.07%	-72.22%
Vrundavan Plantation Limited	-5.88%	-68.81%
Cell Point (India) Limited	-5.00%	-67.85%
Graphisads Limited	-4.55%	-65.72%
SVS Ventures Limited	7.50%	-60.50%
Saroja Pharma Industries India Limited	-18.75%	-58.21%
Mangalam Alloys Limited	-5.00%	-57.69%
Yudiz Solutions Limited	9.94%	-56.76%
Spectrum Talent Management Limited	-14.88%	-55.87%

Data Source: NSE & BSE

The above returns are based on the worst performing SME IPOs of 2023 till date in terms of absolute point to returns. What are the major takeaways from the 2023 numbers?

There were a total of 179 SME IPOs in the year 2023 and the average returns of these 179 SME IPOs across the board on an arithmetic average basis was an impressive 96.66%. Out of the 179 IPOs, a total of 116 IPOs have given positive returns till date while a total of 63 IPOs have given negative returns till date. The risk adjusted returns for 2023 SME IPOs (mean returns divided by the standard deviation of returns) stood at 49.45%.

BEST AND WORST RETURNS ON SME IPOS IN YEAR 2024

The table below captures the best and worst returns on SME IPOs in year 2024 (up to March end 2024 only). We will look at absolute returns across the board, which may not be very indicative but will surely be illustrative. Let us first look at the 2024 SME IPOs that have given the best positive returns till date in terms of absolute point to point returns.

Company Name (SME IPOs 2024)	Listing Day Gain/Loss	Current Gain/Loss
Owais Metal and Mineral Processing Limited	201.72%	464.94%
Australian Premium Solar (India) Limited	172.22%	306.76%
Kay Cee Energy & Infra Limited	343.33%	227.69%
Purv Flexipack Limited	247.89%	195.70%
Alpex Solar Limited	200.39%	188.96%
Docmode Health Technologies Limited	128.80%	170.51%
Rudra Gas Enterprise Limited	99.49%	165.63%
Signoria Creation Limited	111.62%	158.69%
Maxposure Limited	317.42%	148.03%
Konstelec Engineers Limited	215.00%	147.00%

Data Source: NSE & BSE

The above returns are based on the best performing SME IPOs of 2023 till date in terms of absolute point to returns. Let us quickly turn to the losers.

Company Name (SME IPOs 2024)	Listing Day Gain/Loss	Current Gain/Loss
M.V.K. Agro Food Product Ltd	-30.88%	-58.29%
Sameera Agro And Infra Limited	-5.00%	-53.78%
Italian Edibles Limited	-15.07%	-53.75%
Baweja Studios Limited	-3.42%	-50.97%
Euphoria Infotech India Limited	81.51%	-44.71%
Polysil Irrigation Systems Limited	0.46%	-43.52%
HRH Next Services Limited	19.58%	-20.83%
Zenith Drugs Limited	33.10%	-20.63%
Deem Roll Tech Limited	62.56%	-15.23%
Brisk Technovision Limited	17.79%	-14.26%

Data Source: NSE & BSE

The above returns are based on the worst performing SME IPOs of 2024 (first quarter) till date in terms of absolute point to returns. What are the major takeaways from the 2024 numbers?

There were a total of 56 SME IPOs in the year 2023 (first quarter) and the average returns of these 56 SME IPOs across the board on an arithmetic average basis was an impressive 57.17%. Out of the 56 IPOs, a total of 41 IPOs have given positive returns till date while a total of 15 IPOs have given negative returns till date. The risk adjusted returns for 2024 (first quarter) SME IPOs (mean returns divided by the standard deviation of returns) stood at 59.95%.

TO SUM UP, THERE IS GOOD NEWS AND BAD NEWS ON SME IPOS

While, the number of SME IPOs in 2024 is not comparable due to just one quarter data, we can surely compare on other variables. For starters, the arithmetic average of returns has gradually fallen between 2022 to 2023 and to 2024. That is not too encouraging. However, that could also be interpreted as a positive signal in the sense that it shows SME IPOs giving positive returns over a longer time frame. If you look at the ratio of gaining SME IPOs to losing IPOs, it is almost comparable in 2022 and 2023, but 2024, although higher cannot be compared due to just one quarter data.

However, if returns are falling over time in SME IPOs on an average basis, the risk adjusted returns are actually improving. For instance, the mean returns, adjusted for standard deviation has improved from 36.63% in 2022 to 49.45% in 2023 and further to 59.95% in the first quarter of 2024. Apparently, the QIBs playing a bigger role in SME IPOs in 2023 and 2024, has actually made these markets safer and more stable. The only concern is that too much of speculative money is being committed, as is evident from the oversubscriptions. However, that is part of the evolution of any asset class and SME IPOs are no different.