Outlook for SME IPOs remains strong for next 3-4 years

The last calendar year – 2023 – was a record year for small and medium enterprises (SMEs) as the dedicated listing platforms for such entities saw more than 180 companies launching their public issue to raise a cumulative ₹4,686.11 crore.

More importantly, the outlook for the SME segment remains strong with participants with a stake in the SME ecosystem believing that a combination of factors including, strong investor appetite, resilient market and fundamentally strong companies will keep the segment going strong in the coming future.

“The outlook for SME IPOs in 2024 remains optimistic, building on the positive trends observed in 2023. The upward trajectory is expected to continue for the next 3-4 years, driven by the substantial returns generated for investors. Confidence in SMEs from retail, HNIs, and institutional investors signals a robust and resilient market despite external challenges,” says Kresha Gupta, Founder, Chanakya Opportunities Fund 1, a Sebi-registered Category II Alternative Investment Fund (AIF).

This assumes significance as a dedicated SME listing platform was launched by BSE and the National Stock Exchange (NSE) in 2012 and till date nearly 950 such entities have listed with the cumulative fund raising pegged at nearly ₹14,700 crore.  

The Chanakya Opportunities Fund is focused on SMEs and micro-cap companies with 24% allocation towards the listed SME space.

According to Gupta, 2023 emerged as a groundbreaking year for the SME IPO segment as the year not only saw a record number of listings but also saw strong participation from all categories of investors including retail, high net worth individuals (HNIs), and qualified institutional buyers (QIBs).

“When evaluating the surge in IPO performance, particularly in the context of SME IPOs, it is crucial to recognise the dynamics at play. The notable participation from retail investors underscores a deeper level of engagement and scrutiny in the IPO process. Unlike scenarios where demand might be artificially inflated, retail investors engaging in IPOs undergo a thorough examination of the company's fundamentals, risks, and growth prospects,” says Gupta, a chartered accountant by qualification.

Interestingly, the last couple of years also saw the SME IPO segment throwing up startling and too-good-to-to-be-true statistics – unusually high levels of oversubscription followed up by similarly high levels of listing gains.

If one analyses the data of all SME IPOs that hit the market since 2020 and 2023, 10 of the top 20 issues in terms of oversubscription came in the last calendar year.

Meanwhile, the primary market, according to Gupta, is expected to remain buoyant even as major political developments including the general elections are round the corner.

“While an election year often brings heightened volatility to the Indian stock market, particularly impacting the secondary market due to its sensitivity to sentiment-driven news, the primary market tends to remain relatively insulated from immediate electoral effects,” she says.

“In the primary market, where IPOs are launched, investors have an opportunity to subscribe and invest in newly listed companies. This process provides a buffer against short-term market fluctuations driven by election-related news. Unlike the secondary market, where sentiment plays a more immediate and significant role, investors in the primary market are often focused on the long-term potential and fundamentals of the companies they are investing in,” adds Gupta.