A Double-Edged Sword: SME Patforms For Gain & Loss
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This September, Sensex hovering around the 30,000 level and Nifty inching towards 9000 may have brought great investment return for the ones who had entered the markets few years back, or may even few months back. But for some, these are too high levels to enter into the markets afresh. While most of them have been watching the spiralling indexes from outside the ring, wiser and some retail investors who believe in taking higher risks, have been checking out and investing in SME stocks through SME earmarked platforms of BSE and NSE. While the SME spaces are not much known among a large amount of retail investors who have so far shied away from getting into these spaces, a large number of risk-takers have made a good amount of money from their investments in the SME stocks. An almost virgin territory is ready to be grabbed, albeit with its pros and cons.
If one is ready to invest in the companies through SME platforms even after knowing that getting information on the promoters of most of these companies or even the companies itself is a tough task, lot sizes are huge and so every investment has to be worth Rs 1 lakh and its multiples, this not-so-saturated market segment can be checked out.
Dinesh Rohira, Founder and CEO,5nance.com says, “Small and Medium Enterprises (SMEs), in many cases, are the promoter or individual driven and are led by first-generation entrepreneurs. The nature of business of these companies is very competitive and outward-looking. They generally fill - up the space between micro-enterprises and large corporations. There is no track record of the performance and so the investors have to judge the company's prospects and the promoters' ability based on their own assessment.”
While it is true that the returns potential for SME stocks is huge, the down side for such stocks is also very high and may not be palatable to even a seasoned investor. But then the process of earning money from the stock markets always involves a bit of risk-taking activities.
A look at the table below highlights the extremes of SME stock investing.
|
Absolute returns % |
|
Top Performers |
CMP |
3 MONTHS |
6 MONTHS |
12 MONTHS |
| RCI Industries & Technologies Ltd. | 105 | 27 | 52 | 151.20 |
| Kushal Tradelink Ltd. | 163 | 10 | 45 | 101.99 |
| Athena Constructions Ltd. | 56 | 164 | 78 | 90.34 |
| Polymac Thermoformers Ltd. | 28 | 48 | 83 | 43.59 |
| Captain Pipes Ltd. | 54.25 | 43 | 47 | 42.76 |
|
Data as on Sept 1, 2016 |
| |
|
Absolute returns % |
|
Top Losers |
CMP |
3 MONTHS |
6 MONTHS |
12 MONTHS |
| Yogya Enterprises Ltd. | 7 | 55 | -30 | -65.77 |
| AGI Infra Ltd. | 85.8 | 11 | 15 | -27.93 |
| RJ Bio-Tech Ltd. | 32.5 | Nil | -26 | -22.62 |
| Arambhan Hospitality Services Ltd. | 22.1 | -11 | -31 | -21.50 |
| Ultracab (India) Ltd. | 198 | 14 | 16 | -11.76 |
|
Data as on Sept 1, 2016 |
| |
Says Rohira,"Serious and long-term investors should consider this segment since the potential of return on investment is enormous. Some stocks from the SME segment could provide multi-bagger returns. Along with potential returns comes risk and so small retail investors with lesser holding capacity should not rush to invest in this sector. Retail investors may not have the ability to stay invested for a long term without returns on investment.
It is advisable for small investors to utilise the mid- and small-cap segments before they venture into SME sector. However, it remains a very good platform for HNIs and the institutions that have the ability to analyse the companies properly."
But then there are souls like Dinesh Shah, a resident of Mumbai suburb. Shah had invested in Tiger Logistics Limited few months back buying a lot of its shares on the SME platform at a cost of Rs 66/share. Less than a year since the Pune-based logistics company joined BSE mainboard, Shah witnessed his return on investments went up by over 400 per cent and still growing. There are stories also of losing money in SME stocks. But if one can make some serious attempts and gather information about the companies before investing into those and also understand the business those are unto among other such required information, SME stocks can be well multibaggers.
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"This is risk investment and there are no assured returns. However, if you look at the data available on BSE SME platform, total 148 companies got listed on BSE SME and total funds raised on SME platform is Rs.1103.83 Crores [Please note that companies need to dilute at least 25% at the time of IPO] and current total market cap for those companies is Rs. 12,215.04 crores. So you can see that, valuation has grown substantially. However, as mentioned earlier, returns on investments would depend on company to company," said Makarand Joshi, Partner at MMJC.
SME platforms:-
We can see that the performance for the SME stocks enhances impressively once these stocks migrate to the mainboard. The biggest advantage of investing in SME stocks once they migrate, the lot size requirement is done away with and retail investors can buy even a single share which means it is extremely easy to take exposure in these stocks.
Even after getting migrated on the mainboard the liquidity risks remain with these stocks. However, in relative terms, the liquidity position improves with the stocks getting migrated to the mainboard. However, it is observed that at times the stocks don’t trade on platforms for several days together running into a month or a couple of months. This is a common observation across the SME stocks even after they have migrated to mainboards of BSE/NSE.
Veto Switchgears & Cables is the only SME stock which migrated successfully to the mainboard at National stock Exchange from the NSE emerge platform. The performance of the said stock is impressive as the stock gained almost 66 per cent post its migration for the SME platform to the mainboard.
Conclusion: -
Looking at the happening in the SME space and taking a bullish call on the macro-economic situation in India, one can bet on the positive developments in the SME sector to accelerate. Question remains on the ability of the retail investors to encash the growth story in the SME sector in India via SME platforms provided by the leading national exchanges in India.
It is a catch-22 situation when it comes to SME investing as it is apparent that investor base will widen on SME platforms only when there is abundant liquidity in the system and the liquidity will improve only if investors start investing in the SME stocks using the SME platforms provided by the two main bourses, NSE and BSE.
Investors will eventually take to SME investing once they are convinced about the benefits of taking exposure in the SME stocks that are listed on the SME platforms. As a strategy retail investors may look at those SME stocks which have recently migrated to the main board after considering the fundamentals of that particular stocks. One of the most important thing that a retail investor should also keep in mind is the portfolio approach. Including SME stocks in the broader equity portfolio should adhere to the predefined portfolio allocation strategy.
SME investing may not be in vogue currently with the main markets yet to be fully explored by retail investors, but with examples of extra ordinary returns already delivered and more and more SME companies expected to get listed on both the platforms (BSE SME & NSE Emerge), the SME investing game can only get interesting for high risk investors.
Bon Risk – Investing!
How to trade in SME stocks:-
Trading on the SME exchanges is almost like the normal buy and sell procedure and It does not require any extra procedures.
SME exchange has a larger-than-normal lot size – the minimum number of shares you can buy or sell in each transaction. You cannot trade amounts lower than Rs 1 lakh. Important thing to remember is- the lot size varies with the price of the stocks.
For example, if the stock price is lower than Rs 14, then the lot size is 10,000. However, if the stock price is between Rs 120 and Rs 150, then the lot size falls to 1,000.
These stocks are traded in the cash segment. They can be bought and sold either in the continuous market or specifically in the call auction market.
Just like the normal cash segment, these shares fall into different series like the ‘rolling settlement’, ‘block trading window’, ‘ odd lot trading’ and so on.
you can place both market as well as limit orders just like a normal trade which can be modified or cancelled until processed.
Once the transaction is settled, the shares will be delivered in T+2 days.
T R Prashanth Kumar, Head - Investment Banking Division, Karvy.
1.How do you think SME IPOs have performed since inception and over a one-year period?
Since the beginning of the year, 36 companies have filed draft offer documents and have collectively raised over Rs 262 crore through SME IPOs. Of these, 29 firms have filed the document to launch IPOs on BSE's SME platform, while 7 plan to list on NSE Emerge. In 2015, 43 companies were listed to garner about Rs 327 crore from this segment. BSE and NSE had launched SME platform in March 2012, becoming the only two bourses to offer such a platform in the country. Since then, several companies have got listed on them and some have even migrated to the mainboard. The platform provides opportunity to SME Companies to raise equity capital for growth and expansion. It also provides immense opportunity for investors to identify and invest in good SMEs at an early stage. There are 147 companies which got listed in BSE SME Exchange since inception and from this 18 got migrated to BSE main board. Since inception, the average listing gain on the SME IPOs is around 9% and the listing gain for the SME IPO’s since beginning of the year is around 3%. However, these gains should be evaluated on a long-term basis and should be given another 12-18 months to really make use of the potential of the SME Companies. The fact that the average gain is in the positive, it works well for these companies.
2. In your view, should retail investors invest in SME IPOs?
In the stock markets, a smart investor is the one who sees potential in emerging companies that have a great growth potential and enters the markets at the right time. If you belong to the breed of investors that can recognise the future potential in very young companies, the small and medium enterprises (SMEs) segment on the bourses is what you should be focusing on. However, seeking such companies involves a greater dedication towards understanding the companies, in-depth analysis, understanding macro and micro economic factors etc. A retail investor may not be inclined to dedicate so much time towards it. Since SMEs can be high-risk due to their small capital structure, less proven track record of the management, amongst other facets, SEBI has kept the minimum trade value at Rs 1 lakh, compulsory market making for a period of three years and underwriting. The SME platform is good for QIBs and high net worth investors who can analyse companies as above, who can understand the business model correctly and then invest for the long term. They also have the requisite risk appetite which goes well with the SME segment.
3. What are the risk factors involved in investing in SME scrips?
Most of the companies in the segment have a short track record and/or are small. The companies typically are family businesses converted to corporate structure or are first-time entrepreneurs, so, it is tough to precisely enumerate risks related to achieving their growth potential. Having said that, our country has a lot of well performing SME companies and we urge them to step forward and seek to grow further. We are regularly scouting for such companies that have immense potential and just need the correct guidance and timely capital to grow multi-fold.
Sandeep Parikha
Q1. The National Stock Exchange (NSE), the Bombay Stock Exchange (BSE), Inter-connected Stock Exchange (ICE), the Over-the-Counter Exchange of India (OTCEI), among others, have evinced interest in setting up an exchange (or a separate trading platform) for SMEs. Do you think there is a case for a single separate exchange for SMEs(Small &Medium Entreprises) i.e SME exchange in India or you think multiple SME exchanges can function in India smoothly? What should be SEBI's take on a single SME exchange in India?
There is certainly space for competition in the SME exchange space and it is not for the regulator or anyone else to decide how many players should exist in the market. In a market economy, the markets will decide whether the platform offered by one player should survive and do well or not. Since it is an important part of creating an eco-system which enables listing later to the main board, the big exchanges are clearly interested in this segment. In addition smaller players may be interested in creating a unique and nimble environment and may be interested in lower margins compared to the larger players. It would be interesting to see how the market develops over time. But the beneficiary would be the SME companies which are today starved of banking finance as many don’t have the security to offer for banks to be comfortable lending to them.
Q2. What are the steps taken by SEBI to promote SME platforms so far and in your view what needs to done to improve the visibility of the SME platform amongst the investors by various stakeholders including the SME platform providers?
SEBI has held multiple board meetings based on the finance minister’s budget speech to help create a regulatory environment for an SME platform. SEBI has relaxed certain requirements like a quarterly disclosure of financials and also the size and networth requirements which apply to the main board of the exchanges. Conversely, it has also kept the purchase size large, to prevent unsophisticated investors from entering this higher risk market. Some 150 companies have already listed on the SME platform on the BSE of which nearly 20 have graduated to the main board.
Q3. SMEs have been reported of using the SME platform for money laundering and Tax evasion. Whereas the onus lies on SMEs for not doing so, what more can SEBI do to avoid such misuse of funds raised through the SME platforms?
The mischief has been in the mid-cap and small cap market, not the SME platform per se. The best remedy against mischief, and that too tax mischief is with the income tax department. That should not be a reason for restricting the market for good companies. Murders cannot be an argument for stopping sale of knives.
Q4. The lot size to participate in SME IPO is at Rs 1 lac for the participants. Don't you think the lot size needs to be reduced substantially to attract wider base of retail investors? What steps need to be taken to allow a wider base of participants in the SME platform?
The class of equity investment in SMEs is extremely high. Therefore there should if at all be an increase in the lot size, rather than an attempt to invite smaller investors into the market. In this market, it is common for upto half the companies to fail within a short period and sophisticated investors can still make money from the other half which does well. Thus there should not be a change inviting smaller players in a big boys high risk game.
Q5. What are the common concerns amongst the SMEs which want to come on board and get listed on the SME platform? In your view, what needs to be done on listing guidelines & listing norms front, that will help SME companies gain access to the SME platform for smoothly raising fund for its business needs?
SMEs need to judiciously choose between private equity investments and SME platform fund raising as both have their pros and cons. The main challenge to SME companies is their ability to scale up their operations and for that nimbleness is important. The downside of listing is the increased focus on processes and regulatory disclosures, which may make such a company less nimble. There aren’t many regulatory areas of concern in the SME market and small tweaks can be carried out to improve any areas of concern.
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Interviewee : Mr. Gaurav Jain and Mr. Prateek Jain, Directors ( Hem Securities Limited)
Q1. You have managed the IPO issue for Madhya Bharat Agro Products. Are more and more SME companies showing interest in getting listed?
Ans: We are honoured to get quality companies from SME space to get listed on the SME platform of the exchange.The public issue of Madhya Bharat Agro Products Limited was marketed throughout India through our stock broking network and also through our associates' presence across PAN India. We were successful in connecting the right dots and procuring more than 100 crores for this company, which is the highest on the SME IPO platform. What encouraged investors was the right valuation and the proven track record of the company.
Q2. What are the benefits of SME platform in your view and should retail investors participate in SME IPOs and why?
Ans: The SME platform was created to give SME companies access to capital markets. SME companies can come with a small size IPO and avail similar benefits that main board companies enjoy, but at a very low cost and compliances. This platform will help SME companies create a new financial asset for the company which will give them visibility, brand value and good valuation for themselves.
SME platform should be considered at par with investing in main board IPO’s. Many good companies on SME platform have created wealth, given dividends and even bonus as is the case with main board companies. As we move forward SME companies would attract more participation and you would see larger retails investors participate in SME IPO’s as this avenue helps to create wealth.
Q3. What are the key risks that you would like retail investors to keep in mind before investing in SME stocks?
Ans: Predominantly investors should look at 3 things before investing in any IPO (i.e. Main Board or SME).
1)Valuation of the company at which the shares are offered.
2)Professional track record of the promoter.
3)Consistency in the financial growth of the company.
Q4. What can you say about the regulatory mechanism for the SME platform? Is the regulatory mechanism as robust as it is for equity markets in India where large and mid cap shares are traded on BSE & NSE?
Ans: The regulatory requirement for listing on the SME platform and compliances adhered thereafter have been simplified to a larger extent to promote and encourage SMEs to list and get equity advantage in business. This platform will encourage companies to adhere to transparent corporate governance practices and later provide an easy migration opportunity to the main board.
Interview of Pankaj Ostwal, Managing Director, Madhya Bharat Agro Products Limited
Q1. What are the benefits of getting listed on SME platform from a company's perspective?
Ans: The most important benefit of getting listed for any company is visibility. The company is visible to over two crore investors in India. Another important benefit is moving from the net worth model of valuation to the market cap model. The share certificate which carried book value until now will now become a financial asset of the company and will carry market value post listing. After getting listed our company, it will attract brand value and credibility in the eyes of all stake-holders. Also, for an unlisted company, the only way of arranging finance is bank loans and internal funding. Listing opens up an additional source of finance for the company. As a fertiliser company we have been working with certain reputed stakeholders like DCM Shriram, MP State Mining Corporation and Bina refinery. We need credibility and listing will provide that credibility and brand value.
Q2. How difficult it has been for your company to complete the process of pre listing? What are the key aspects that should be kept in mind while getting listed for a SME company like yours? What are the changes/amendments that SEBI should do as far as rules are concerned to make this platform more attractive for companies and also investors?
Ans: The process of listing on the SME platform is very simple as compared to the main board. The draft prospectus of our company was filed within one month from signing of mandate and we opened the IPO in about two months of filing of draft prospectus. In the listing process, the investors should look at the promoter track record and his expertise in that particular sector. We feel that SEBI should change the minimum investment size which is capped at Rs. 1,00,000 and above. Because of this cap of minimum investment, lot retail investors are unable to participate on SME platform leading to liquidity crunch.
Q3. Why should investors look at investing opportunities in SME space?
Ans: For an investor the most important thing is to identify the gems in the stock market which will give him extraordinary returns. SME companies have huge growth potential, hence investors have an opportunity to gain significant returns from SME stock. We have seen that several companies like Captain Polyplast Limited, Ashapura Intimates and Fashion Limited, Dhabariya Polywood Limited and many others have given returns in excess of three times post listing. Many large-caps and blue chips are not able to give this type of extra ordinary return.
Rahul Shah,Vice President -Equity Advisory Group, Motilal Oswal Securities
Q1. In your view how has the SME IPO performance been in past couple of years?
Ans : I think the performance has been mixed. Very few IPOs have done well but the majority has not done great plus on the other hand retail participation has also been poor.
Q2. Would you recommend retail investors to participate in SME IPOs? Should HNIs invest in SME IPO or investors are better off investing on mainboard only?
Any day participation in BSE and NSE is a better investment than on the SME for various reasons including the large free float and proven track record of the management etc., but you can’t ignore the SME side also. It will be important to understand from investors point of view as to for what purpose is the money being raised, what is the track record of the company management and also it will be helpful to understand the grading of the IPOs.
Q3. What are the risks (excess risks) that one takes while investing in SME IPOs in your view?
I think the biggest risk is, obviously, as it is small company, you might have some capital constraint. Firstly, how this capital constraint affects the profitability of the company is important to know and is the biggest challenge. Secondly it is the quality of management. With low turnover we don’t know the proven track record and the quality of management and it becomes difficult to know about it and comment on it.
On the other hand, companies which are listed on the larger platform, you know that these companies have a proven track record and information about their management and how the company is doing in that particular segment even if it is a private limited company.
Well, it’s not bad to invest in the SMEs but due diligence is must. The quality of management, the overall grading of IPOs, a look at their balance sheet and for what purpose they are raising fund is also important for investors to understand before participating.