Should you be wary of the SME IPO frenzy?

Fears of a global slowdown and a weak macroeconomic landscape have not deterred the small and medium enterprises of India from entering the primary market this year. 

Despite soured sentiment in the secondary markets, 87 SMEs have launched their IPOs so far in calendar year 2022, raising Rs 1,460 crore as against Rs 783 crore raised by 56 such firms last year.  

In the first half of the current fiscal, 62 SME IPOs hit the street and garnered a total of Rs 1,078 crore in comparison to 30 IPOs in the same period in 2021-22, which collected Rs 346 crore, data from PRIME Database showed. 

Analysts attribute this to a healthy domestic economy, and liquidity conditions that have kept equity markets buoyed over the last few years. 

According to G Chokkalingam of Equinomics Research, the share of SMEs in the overall market cap is less than 1% and the market will see a couple of thousands of SMEs getting listed in the next five years.”

“These firms are widely diversified and their performance would vary, but wealth creation would be enormous, as we have already seen many of these firms become large companies in the past,” says G Chokkalingam, Founder and CIO, Equinomics Research. 

However, experts advise caution against the frenzy of SME IPOs amid looming risks of a global recession. 

With over 40% of India’s exports being led by medium and small enterprises, the ongoing slowdown in global trade raises uncertainty for these domestic export players.

As per Kotak Securities, the US and major European economies contribute nearly 50% of the exports by MSMEs. The impact on the production side would be felt through manufacturing, wholesale and retail trade. If the global situation was to exacerbate and affect MSMEs substantially, it may also slow down credit and increase pressure on asset quality. 

Besides, analysts remain wary of the record returns that SMEs have been delivering in the market. 

Nine small and medium enterprises made a stellar stock market debut on October 10 with some of the counters even doubling in value. Six of these nine held on to the listing pop by close.

Speaking to Business Standard, Ambareesh Baliga, Independent Market Analyst says several SME stocks have become multi-baggers post listing. Investors flocking to these issues to make easy money. This is leading to froth building up in this space. Unsure how long this frenzy will last. 

Today, the market trajectory will be guided by global cues, domestic corporate earnings of companies and how the rupee plays out.