Investors are often attracted to the potential listing gains of SME companies, as historical data indicates that there is only a 17% chance of the listing price falling below the issue price. This leads many to invest primarily for short-term listing gains, which can be considered speculative. Notably, around 13% of these companies have delivered listing gains exceeding 90%, providing what can be seen as "free profits" for investors. Additionally, approximately 69% of companies have generated positive returns, albeit at levels below 90%.
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Also, the percentage returns in share price of the companies from their issue price can be seen in the following table:

Analysis shows that 70% of companies have generated positive returns from their issue price, with 50% of these companies yielding returns of less than 300%. Based on historical data, if you invest in 10 SME companies, you can anticipate that 2 will provide returns greater than 300%, 5 will offer positive returns below 300%, and 3 will incur negative returns.
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While the numbers might entice investors to consider SME companies and their IPOs, there are underlying issues worth discussing. The recent surge in demand for SME IPOs in India has been remarkable, with subscriptions exceeding 100 times for many offerings. The interest in SME IPO has grown as retail investors seek opportunities amid a scarcity of mainboard IPOs. However, there are concerns regarding the underlying quality of these investments. Historically, the SME sector in India has faced challenges, including a lack of transparency and potential financial misreporting. The liquidity in SME stocks remains a significant concern, as trading volumes are often low, making it difficult for investors to sell their shares after purchase.
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If you are in the investment world, you must have seen Jaspal Bhutta's video about "PP Water Balls," where a golgappa (a type of snack) vendor launches an IPO, and people invest in it, believing that applying will never lead to a loss. The share price rallied and gave multi-bagger returns however, shares priced at ₹10 quickly dropped to ₹1, resulting in losses for investors.
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Now let's take an example of the recent IPO of Resourceful Automobiles, this small bike dealership operates only two showrooms and employs eight people, making it far from a major player in the industry. Despite this, the company sought to raise ₹12 crores through its IPO. Surprisingly, investor interest surged, with total offers reaching nearly ₹4,769 crores—an astonishing amount for such a small enterprise.
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However, a significant portion of the funds raised was not intended for business growth but rather to pay off existing debts. Despite this concerning aspect, the stock maintained its value, never falling below its issue price. This situation raises important questions about the sustainability of such trends in the SME market and the rationale behind investor enthusiasm for these IPOs.
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Now, let’s see data that shows the percentage fall of the SME company share price from their All Time Highs(ATH):
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The data reveals that approximately 23% of the stocks have experienced declines of over 50% from their all-time highs (ATH). In comparison, only 40% of the stocks are trading near their ATH or have fallen by 25% or less.
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The current market environment is described as euphoric, with many investors rushing into SME IPOs without understanding the fundamentals. While small companies have the right to launch IPOs on the SME exchange, investors need to carefully evaluate the fundamentals before investing. What I want to emphasize is that it is not the company's fault for launching the IPO but the investors' responsibility to make informed decisions. If the investors select fundamentally backed companies then the risk of downside seems to be lower.
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On the flip side, every large company in the world started as a small entity, just as every person who is now 50 or 60 was once a child. Similarly, every major corporation began as an SME. Many of these small companies go public through IPOs. When small companies aim to grow, it’s important to note that not all will succeed; some will remain small, while others may fail entirely.
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For instance, consider a company valued at ₹1 lakh crores, like HDFC, which can yield substantial returns had started small someday. Imagine if you had invested in Reliance 20 or 30 years ago; the returns would have been enormous. If you identify a promising small company, the growth potential can be significant, but if you choose poorly, it could lead to failure. For example, when Rakesh Jhunjhunwala invested in Titan, it was nearly an SME at the time, with a market valuation of around ₹300 crores. This illustrates the potential for high returns in SMEs.
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Additionally, many companies with valuations between ₹300 crores and ₹3,000 crores can experience rapid growth, making this segment attractive for investors who can spot real growth opportunities.
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Historically, among 757 small-cap companies, there has been a notable transition: 9 have evolved into large-cap companies, 86 have become mid-cap companies, while 662 have remained classified as small-cap. This data pertains to companies with a market capitalization exceeding ₹500 crores and reflects changes from January 2019 to December 2023.
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This brings us to an important quote that Warren Buffet stated - When you buy a stock, you are not just buying a piece of paper; you are buying a business.
This perspective encourages investors to focus on the underlying business's performance, management, and growth potential. By understanding the company's operations, financial health, and market position, investors can make more informed decisions. Buffett's philosophy highlights the importance of evaluating the long-term value and sustainability of a business, rather than being swayed by short-term market fluctuations or speculative trends. Ultimately, it serves as a reminder that successful investing is rooted in a deep understanding of the businesses behind the stocks.
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Furthermore, to address the surge in speculative investments in SME IPOs, exchanges have introduced more stringent listing requirements. These new rules have significant implications for investors. While they offer greater safeguards by ensuring that only well-established companies can go public, they may simultaneously constrain access to high-risk, high-potential startups, thereby reducing investment options for those seeking exposure to such ventures.
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In summary, SMEs carry both the risk of failure and the potential for significant rewards. Our task is to find companies that have the potential to grow. Many large corporations started from humble beginnings, like Microsoft and Amazon. The most important thing in investing in SMEs or any company is that profits must continue to grow. It is important to understand that if profits grow, prices will grow; if profits do not grow, prices will not grow. To increase profits, sales must also grow, indicating that customers appreciate the product. Our goal is to invest in companies that we believe will see profit growth in the future. This translation captures the essence of the conversation, focusing on the insights shared about investing in SMEs, the associated risks, and the potential for high returns.
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In the world of SME IPOs, not everything that glitters is gold. But with the right approach, you can still find some real gems.
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