Gujarat SMEs ride IPO boom

For decades, Gujarat has been a stronghold for micro, small, and medium enterprises (MSMEs), and now, many of these businesses are turning to equity markets to fuel their growth. While SME IPOs offer a lifeline for companies struggling to secure loans, helping them raise funds, build brands and improve governance, a recent surge in listings has sparked concern. With unprecedented investor bids and some shaky fundamentals, industry experts are cautioning investors to tread carefully.

Gujarat ranks second in SME IPO listings

According to data from the National Stock Exchange (NSE), between April and Aug 2024, “Eighty companies were listed on the Emerge platform, with 19 of them being from Gujarat, ranking second behind Maharashtra, which had 20 listings. Maharashtra celebrated its 150th SME listing in Aug 2024, and Gujarat is close to reaching the same milestone. Over the years, 555 companies have raised Rs 13,988 crores on the NSE Emerge platform, with a combined market capitalisation of Rs 2,02,000 crores.” Maharashtra, Gujarat, and Delhi account for around 67% of all SME listings on NSE Emerge while the top 10 States together held a 93% share of the companies listed till Aug 2024. Interestingly, 140 companies out of 555 companies from NSE Emerge has already migrated to mainboard.

Meanwhile, on the Bombay Stock Exchange (BSE) SME platform, Gujarat ranks second with 153 listed companies, compared to Maharashtra’s 167. In total, 525 companies have raised Rs 7,243 crores on the BSE SME platform, with a combined market cap of around Rs 1.87 lakh crores. Of these, 188 companies have since migrated to the main board of the BSE.

Experts warn investors to be cautious

Due to high liquidity, some SME IPOs have received overwhelming investor bids recently. A senior official from the Securities and Exchange Board of India (SEBI) has raised concerns about inflated financial statements in some SME IPOs, calling for exchanges to reject questionable listings and urging auditor to conduct thorough due diligence. Vaibhav Shah, MD of Monarch Net worth Capital Ltd, emphasised the importance of scaling potential when considering investments in SME IPOs. “Investors should focus on the company’s current scale and future growth potential. It’s important to check the company’s track record and its management’s ability to scale the business. While some companies may pose risks, others have shown significant growth post-IPO.” Gunjan Choksi, founder and MD of Investallign, highlighted the growing retail interest in SME IPOs over the past three years. While the SME platform has outperformed mainboard IPOs in many cases, not all of these performances were driven by sound fundamentals. “There have been instances of financial misrepresentation, and many investors have lost money. It’s crucial for investors to understand the business model and valuations before investing. Many SMEs list on the platform because they cannot secure private funding and the regulations for SME listings are not as strict as for mainboard listings. Recently, many SME IPOs have been oversubscribed by over 1,000 times, which is a clear indication of speculative trading for quick gains.”

IPOs with strong fundamentals yield high returns

Some SME IPOs backed by strong fundamentals have delivered impressive returns. Shree Ganesh Remedies Ltd (SGRL), an Ankleshwar-based pharmaceutical intermediates manufacturer, raised Rs 8.55 crores through an SME IPO in 2017, with shares priced at Rs 36 each. “We are active in the pharmaceuticals intermediates manufacturing and have seen our revenues grow from Rs 27 crores in 2017 to Rs 126 crores in FY 24. We are also expanding our manufacturing capacities,” said Chandu Kothia, Chairman of SGRL. The company’s market capitalisation now exceeds Rs 1,000 crores, offering a return of 2,733% to its investors. SGRL migrated to the BSE mainboard in 2022. Similarly, Sanand-based Energy Mission Machineries Ltd raised Rs 41 crores through an IPO in May this year, receiving bids worth Rs 9,500 crores. It was oversubscribed 320 times. The company offered shares at Rs 138 each, which were listed at Rs 366, a premium of 165%. Snehal Mehta, promoter of the company said, “We have strong fundamentals and registered 26% revenue growth in FY 2024, reaching Rs 126 crores. This increased investors’ confidence.”

The company designs and manufactures CNC and conventional metal-forming machines which cater to the industrial sector’s requirement for metal fabrication solutions. The funds raised through the IPO were used to expand its manufacturing capacity in Sanand and cover working capital and corporate expenses. After listing, the stock price dropped to Rs 300. It later recovered to Rs 560 and is now trading at around Rs 470. According to NSE Emerge, on the platform, capital goods sector has the highest weightage at 25.33% followed by information technology (14.96%) and healthcare (10%). Construction and FMCG each have more than 6% while the consumer durables sector has 5.43% weightage. “Emerging companies are increasingly taking the SME IPO route and we are now seeing companies from diverse sectors entering the market. SMEs believe that IPOs will improve their visibility and brand image. Also, corporate governance will improve with mandatory compliance required for a listed company. These factors play a crucial role in the growth of any company,” said an NSE official.

Industry speaks

SME IPOs are growing in number and some companies have good fundamentals. However, people must check the company’s track record and the management’s ability to scale the business before making an investment.  There is growing retail interest in SME IPOs over the past three years. SME platform has outperformed main board IPOs in many cases but not all of these performances were driven by sound fundamentals.