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There haven't been too many initial public offerings (IPO) on the exchanges in the past three years. However, the SME segment, a platform introduced in 2012 for listing small and medium sized enterprises, has been active, with 86 offerings on the BSE and another six on the National Stock Exchange (NSE).
Their performance since listing has been a mixed bag. Five of those listed on the BSE have clocked gains of about 1,000 per cent, while another 13 have given returns of around 100 per cent. However, 37 firms are in the red. Among those listed on the NSE, four are marginally in the black and one has given negative returns. Almost half these stocks were listed in 2013.
Strategy
Can investors add these to their portfolio? For starters, these stocks are not meant for retail investors, as the minimum lot size for investment varies between Rs 1 lakh and Rs 2 lakh. According to experts, high net worth individuals with a high risk appetite can look at these, provided they do not make up more than five per cent of the total equity portfolio.
"There can be a few opportunities in this segment if investors are willing to take risks. You need to think like a private equity or venture capital investor and bet for the long term," said G Chokkalingam, founder, Equinomics Research and Advisory. His quick tip: Look for an idea or theme that can become big in the next four-five years. Look for companies with a turnover of at least Rs 50 crore, with a consistent record of profits.
Since there is a high probability of your entire capital being wiped out in these companies, experts have a word of advice. "Invest in at least 10 stocks at a time. Even if most of these bite the dust, one or two might be able to give super-normal returns," says Feroze Azeez, executive director at Anand Rathi.
Extending this logic, Azeez feels investors should enter and exit these stocks at the same time. "View your investment as a portfolio, not as individual stocks. Exit may be difficult because of poor liquidity but the plan should be to exit the entire portfolio in less than six months," he says.
Analysing these firms can be difficult as they are not tracked by analysts and there is not much information in the public domain. This means investors are on their own when it comes to assessing the fundamentals and gauging credibility of the promoters. "Management credibility is the most important aspect to look at. Find out if the promoters have been able to successfully turnaround such start-ups in the past," says Azeez.
The good news is that the BSE is looking to strengthen the qualitative aspects of firms listed on the SME platform. From April 1, companies need to meet the minimum net worth requirement of Rs 3 crore, as opposed to Rs 1 crore earlier. Similarly, the threshold for post-issue paid-up capital, as well as the net tangible assets, will be raised to Rs 3 crore. A higher limit should deter non-serious players from accessing the market and bring in better promoters.
The listing norms for Emerge, the SME trading platform of NSE, will not be changed but the exchange has been selective about allowing companies to list. Emerge prescribes that a company has a record of three years and positive cash accrual from operations for at least two financial years prior to making a listing application.
Liquidity can be an issue. "It is an extremely shallow market and there is no genuine buying and selling on the platform. The stocks are traded among a select group, mostly promoters. You can't get in and out at will," says G Ganesh, founder, Inga Capital. Adds Azeez: "If we compare a company with a market capitalisation of Rs 25 crore with another with a market cap of Rs 25,000 crore, the impact of poor liquidity on the price movement of the former can be 20-40 times more."
To be sure, under the present guidelines, market makers are required to ensure liquidity for three years after listing. "Market makers are required to provide buy and sell quotes for 75 per cent of the market time each trading day," says Gaurav Jain, director, Hem Securities, adding that in many cases, liquidity on the segment is better than in some of the small-cap companies listed on the main board. "Remember that the universe of stocks is limited. While there are 90 stocks listed on the segment, only about 10 might offer a good investment opportunity," says B Gopkumar, head - retail broking, Kotak Securities.
Way ahead
Some experts believe the SME system is not yet conducive for non-institutional participation. "I would not recommend the segment even for high-risk investors. There are enough stocks on the main board to invest for those looking for multi-baggers," says Ganesh.
He has a point. Since 2012, about 60 BSE small-cap firms have given more than 500 per cent returns. Also, of the 16 firms listed on the main exchanges since 2012, seven have gained more than 100 per cent.
Ganesh believes the need of the hour is to improve institutional participation. "Public sector banks should be allowed to invest in these firms. Only once the overall institutional participation improves, should the segment be thrown open to non-institutional investors."
