InvestorQ : With so many SME IPOs hitting the market, is it a good investment or should investors be wary?
Anamika Sodhani made post

With so many SME IPOs hitting the market, is it a good investment or should investors be wary?

Angel dcosta answered.
1 month ago

Mainboard IPOs may be few and far between but that has not deterred the number of SME IPOs in the SME segment of the stock exchanges. SMEs are not overly bothered by factors like FPI flows, start-up funding inflation etc. One only has to look at the rather impressive numbers. In calendar year 2022 till date, a total of 87 SMEs IPOs have been launched, so it could be well above 100 SME IPOs for the full year. Total collections are still small at Rs1,460 crore, so it is not a size worry at all. Even if you just consider the current fiscal year from April 2022 onwards, Rs1,078 crore was raised. In all of 2021, there were just 56 IPOs.

To an extent this is a healthy signal and shows that small companies with sound business models are getting the money they need. Also, the investors are largely HNIs in these issues. Unlike the larger IPOs, factors like liquidity, valuations and global sentiments are not an issue at all. Also, many of them could become superstars of tomorrow. But there is a business exposure risk in most of these SMEs. Many of these SME IPOs have vulnerable business models predicated on just a handful of clients or orders. In the past, we have seen such things change at short notice, changing the fortunes of these SMEs.

But, there are more reasons to be cautious about these SME IPOs. The big risk is their overt dependence on export orders and that is what is now under pressure. Let me explain. According to the FIEO, more than 40% of India’s exports have been directly or indirectly driven by the MSMEs. The likely recession in the US, UK and Europe could result in a slowdown in exports and that is evident in the recent trade numbers and the IIP numbers. Keep this at the back of your mind, when you find salivating SME IPOs doubling in no time.