A fifth of recently listed SMEs see sharp fall in revenue growth after IPO

Data analysed from Capitaline shows that of the 97 SMEs that got listed on the SME platform in 2017, around a dozen companies' net sales fell in the range of 11-93% in FY18

The small and medium enterprises’ (SMEs) listing offers investors a chance to participate in high-growth stories at an early stage of their business cycle. However, one-fifth of the recently listed SMEs have clocked single-digit top line growth or in some cases de-growth after these companies reported median growth of more than 50 per cent before listing.

Take the case of the gems and jewellery company Pure Giftcarat, which got listed on May 8, 2017. Its net sales had doubled to Rs 97 crore in 2016-17 (FY17), from Rs 45 crore in 2015-16. But after listing, three-fourth of the company’s top line got wiped out, as net sales dropped to Rs 24 crore in 2017-18 (FY18).

The data analysed from Capitaline shows that of the 97 SMEs that got listed on the SME platform in 2017, around a dozen companies’ net sales fell in the range of 11-93 per cent in FY18. Meanwhile, eight reported single-digit growth in FY18.

The Ahmedabad-based Riddhi Corporate Services’ growth figures in FY17 and FY18 (after listing) are in stark contrast. The company - which offers business process outsourcing services to telecom, banks, and non-banking financial companies - reported a top line growth of more than 60 per cent in FY17. The top line dropped by 70 per cent in FY18 to Rs 19 crore.

Analysts say investors looking to bet on an SME’s initial public offering (IPO) need to assess the company’s ability to sustain long-term growth, instead of getting swayed by multifold growth figures reported in the years preceding the IPO.

“SMEs showing excessively sharp growth, compared to the sector peers listed on the main-board of the exchanges, should be a red flag,” said Balaji Vaidyanath, chief executive officer of Crest Wealth Management.

Analysts add there could also be instances of window-dressing of the financials for prospects of stronger listing.

Experts say some of the issues may be related to the timing of the public offering.

Pankaj Murarka, founder of the Renaissance Investment Managers, pointed out that some of the IPOs might be tapping the public markets when the management feels their business growth has hit a certain peak. “It is normal for companies to seek optimum value for their businesses and therefore, the financials around the IPO are typically strong,” he said.

According to investment bankers, quality IPOs - where the size of the issue is more than Rs 10 crore - is a better indicator of how SMEs perform after listing. While the situation improves when the sample size is narrowed down to meet bankers’ definition of ‘quality’, six of these IPOs reported 13-73 per cent drop in top line after listing. The median top line growth for these companies was 50 per cent before listing.