185% return in 2 months: Meet Kulbhushan Parashar who knows the art to leave value for SME IPO investors

Delhi-based Kulbhushan Parashar (38), a seasoned investment banker and investor, emerged as one of the most successful value-creators for investors in the domestic SME IPO space in recent times. Take this: some of his SME IPOs including DroneAcharya Aerial Innovations, Annapurna Swadisht and Phantom Digital received a massive response from the investor fraternity. DroneAcharya Aerial, which got subscribed 243.70 times in December 2022, traded 187 per cent higher at Rs 155.20 on February 24, 2023, against its issue price of Rs 54. With over 150 times subscription, Annapurna Swadisht and Phantom Digital Effects now traded at 87.50 per cent and 85 per cent up against their respective issue prices. These companies also got listed in 2022.  

Parashar is the Founder and Managing Director of Corporate Capital Venture (CCv), which has recently filed the DRHP for Delhi-based Crayons Advertising. In his latest interaction with Business Today, he shared his views on how he valued the forthcoming SME IPO and how Sebi can protect small investors from sky-high valuations. Edited excerpts: 

Business Today: You are the investment banker for Crayons Advertising, which has recently filed a DRHP for its SME IPO with NSE Emerge. How do you value an advertising company?  

Kulbhushan Parashar: Any advertising agency is valued in the same way as a regular corporate. The net profits form the base, and a decent average multiple of the peer group is applied to arrive at the valuation. In the case of Crayons Advertising, we have valued it attractively - at least half of its fair valuation – which we feel is essential to the essence of IPOs.

Crayons Advertising has a demonstrated legacy of 35 years and is the largest home-grown integrated advertising firm. It has an incredible team, pan-India presence and long-standing clients across high-growth sectors, including tourism, BFSI, Government departments, and Infrastructure. The company is among the few players with a presence in strategic events and its dedicated digital innovations vertical. It operates in a sector set to grow at a double-digit rate owing to India’s economic potential and sustained government spending. 

BT: How excited are small firms to raise money from the primary market? How much money did they raise in 2022? 

Kulbhushan Parashar: Very much. We receive an average of 25 calls daily from small business owners, and we meet personally or virtually at least 25-30 businesses weekly. The equity-led fundraising is getting attractive as entrepreneurs are now aware of the suffocating terms of venture capital, private equity and banks. Also, some great companies in the coming years will eventually come from the SME platform, where we will see the promoters’ fundamental skills and innovation. For these reasons, some of the big marque investors have also started investing in these companies at an early stage. These SME companies will be part of some critical indices in the coming years. 

SME firms have mopped up over Rs 1,800 crore through 103 offerings in 2022, more than twice the 38 mainboard issuances that have hit the market. The collection is 142 per cent higher than the previous year and is higher than the cumulative Rs 1,529 crore garnered in the last three years.  

BT: How many IPOs on the main board and SME exchanges have you valued since inception? What is your rejection ratio? 

Kulbhushan Parashar: We have met more than 2,500 companies and promoters since 2017. Understanding the promoter's intention and the company's business model is a critical learning experience. However, we have executed only 15-odd IPOs to date. To add, our rejection ratio has been close to 95-98 per cent in the last few months. 

BT: Why your rejection rate is too high? What red flags do you check before accepting the valuation offer for the IPO? 

Kulbhushan Parashar: Our concerns are mainly related to the promoter’s credibility, business prospects and model or way of doing business. We avoid companies which do not have a proper business plan or operate in a business segment which would not excite investors or promoters with a suspicious background. We also reject companies that try to conceal material facts with fake transactions or various fraudulent activities or work on bogus billing or profit. Promoters with criminal track records and backgrounds of cheating or fraud are also one of the main reasons to reject companies. Apart from discussions with management and promoters, we also do our due diligence by talking to the vendors or critical suppliers of the company before signing a mandate. 

BT: Considering your success in the SME IPOs last year, can you elaborate on how you value public offers? What are your criteria? 

Kulbhushan Parashar: It is essential to value the company at the right price, and it is necessary to leave substantial gains for investors on the table. Promoters are keen on aggressive valuation, and we try to play a balanced role in setting the proper valuation. Our valuation strategy is simple and is based on the company's growth story in the next three-to-five years, the potential of the promoters to scale up the business, multiple earnings at a deep discount, tailwinds to the industry and alignment with government initiatives. Apart from working on quantitative, much emphasis is given to qualitative parameters, like promoters' background, experience and ability to manage through adversities. 

BT: Retail investors have lost enormous wealth in the past two years in some of the new-age IPOs. Who is responsible for this wealth erosion? 

Kulbhushan Parashar: Only the greed of the issuers and merchant bankers is responsible for this erosion in value. If the issuer company demands to exaggerate valuation, then merchant bankers should deny it. Leaving substantial returns for the investors while valuing a company is essential. The market eventually punishes greedy promoters. 

BT: What are the precautions a retail investor should take while investing in IPOs? 

Kulbhushan Parashar: Apart from reading the fundamental analysis in various media, he should personally try to read the offer document before investing. He should be neutral on the grey market premium and subscription figures, which indicate little about the potential opportunity in the company. At times grey market premium and subscription figures may be rigged or managed by a section of the market for some personal benefits. 

BT: Which is riskier: Mainboard IPOs or SMEs? 

Kulbhushan Parashar: Investment in the stock market is always subject to risk, which may, at times beyond the control of any individual. SME public offerings are equally risky as main board issues. In the case of SME issues, the minimum investment size is in lakhs, whereas on mainboards, it’s in thousands, and the liquidity in SMEs can be scary.  

BT: What is Sebi doing for the protection of investors from exorbitant valuations? Do you have suggestions for the market regulator? 

Kulbhushan Parashar: We think Sebi should permit hard underwriting in mainboard IPO too, which presently happens only in the SME segment. Secondly, just like fund management or mutual fund norms, we think merchant bankers shall also be asked to put their money/family money in IPOs managed by them. 

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