More Than 1500 SMEs Will List In The Next Few Years Providing More Opportunities For Investors
More than 1500 SME IPOs are expected to list on the bourses in the next three-four years as promoters start to look for alternative funds to grow and also list their companies. Hem Securities, which managed close to 50 SME IPO, is upbeat on the prospects of the SME sector, even while many SME stocks have corrected like in the broad market. Gaurav Jain, Director at Hem Securities shares his views with BW Businessworld's Clifford Alvares on SME IPOs market. Excerpts:
Do you think that the Indian SME market has started maturing and how different it is compared to other global markets?
SMEs have become silent drivers of economic development and globally, governments have recognised their role and importance. But the biggest challenge faced by these enterprises is access to capital. In order to overcome this, almost all experts have realised the need for a separate exchange for the SME segment. SME IPO bridges this funding gap between a private equity and venture capitalist, and therefore there is a need for a specialised platform for SME companies.
Globally, more than 20 countries operate separate SME bourses. These markets have tried to create an SME friendly market architecture supported by effective institutions and forging links to policies that foster a new class of investable equities. We too are moving in this direction as India is a land of SME's and with the government’s emphasis on the development of SME's, we are going to see more and more SME IPO's in the coming years. We expect more than 1500 SMEs to be listed in the next 3-4 years.
In the last financial year ended March 31, 2018, SME companies have raised a record Rs.1,785 crore through IPOs in 2017, which was more than three times the funds raised in the preceding year. These funds were raised for business expansion plans, working capital requirements and other general corporate purposes.
SEBI recently approved the ICDR Regulations 2018. How do think it will impact the SME IPO market?
SEBI reduced the minimum anchor investor size to Rs 2 crore from the existing Rs 10 crore. This will lead to more participation in IPO placements. As the size of these IPOs is small, in the range of Rs 20 crore to Rs 40 crore, the move will democratise the process and broad-base the market. With these changed guidelines, even issues less than Rs 10 crore would be eligible for anchor investor enabling more SME companies tapping higher number of institutional investors. Also, SEBI's move to include immediate relatives within the ambit of the definition of promoters is good.
Why are institutional investors getting into SME IPOs even when the size of these IPOs are small?
There are two reasons for this. One is attractive valuations and second, the potential to grow multi-fold because of low base effect. By nature, SME companies are small in size, and can be brought at relatively lower valuations as they stand at an emerging stage. Further, given the business growth potential and smaller market capitalisations, some of these companies can deliver handsome returns. This is attracting even domestic mutual fund managers who have started to track this space.
Alternative investment funds are investing in them at both primary and secondary levels. We have already seen participation in many renowned wealth houses, portfolio managers and family offices, who have started looking at this market more seriously.
We have to understand that the SME platform is not specifically for regular trading but for informed investors who can bet on companies for the long-term.
How do you read the future of SME IPO in the country in the next five years?
We have 400 companies listed on SME exchange in last five years. In the next five years, more than 1500 SME IPOs will list on the bourses providing opportunities for investors. Most of these companies will have well-defined business models or operate in niche areas and geographies. These companies would come from pharma, infrastructure, and other emerging sectors.
We believe the future of the SME IPO space is bright and we see many blockbuster IPO's in the coming years. We will not be surprised to see minimum 15-to-18 IPOs every month in the current financial year, once the sentiments improve due to market conditions.
How serious are SME promoters looking at raising funds through this route?
Growing SME capital market has addressed several myths and lent a lot more of confidence to growing entrepreneurs. Fundraising through SME IPOs make it possible for promoters and companies to execute their capex plans through equity issuance rather than leveraging their balance sheet with a huge debt which in turn dampens profitability due to high-interest cost. The funds raised through the IPO are giving a strength to the balance sheet as it helps in improving the debt-equity ratio and the listed shares are used as a collateral for further fundraising from banks. Listing at the SME platforms is also providing the companies the enhanced visibility and credibility among the customers or competitors.
Is SME listing emerging as a better option than private-equity investments?
SME IPOs are emerging as a better option compared to private equity investment for the promoters as an IPO gives the company and the promoters to create more visibility and establish the company's credentials with the investors. Further, listing provides them better liquidity for entry and exit for big investors.
On the other hand, private-equity deals are limited. Most private-equity investors avoid small companies as they find it very difficult to establish an exit route as the investment matures. It's in this sense that promoters now prefer to list rather than dealing private equity investors, especially companies with a robust business model.
What are your future plans?
As a merchant banker, we at HEM Securities have listed almost 48-50 companies on the SME space in the past few years. We were among the first few merchant bankers to take part in the SME space. We want to capitalise on our expertise in this field and bring very high-quality companies on SME platform which have ethical promoters, scalable business model and totally system-driven organisations, which can create wealth on a sustained basis.
We have also filed an offer document with SEBI for a main-board IPO in telecom-infra space and are running few more mandates on the main board space which we plan to close this financial year.
