From 2 Showrooms to ₹4800 Crore Frenzy: How a Local Yamaha Dealer Ignited the Craziest SME IPO Yet

The small and medium enterprise (SME) IPO market has recently seen some wild action, with the latest example being the IPO of Resourceful Automobile, a two-wheeler dealership. The company, which operates as Sawhney Automobiles, has just two showrooms in Delhi and eight permanent employees. Despite its modest size, the IPO sparked a frenzy that one might expect for a tech giant, not a local bike dealer.

A Modest Start, a Big Response

Resourceful Automobile, founded in 2018, specialises in selling and servicing Yamaha motorcycles and scooters. The company’s financials are relatively small, with revenue of ₹18.8 crore in FY23 and a profit after tax (PAT) of ₹41.5 lakh. For the 11 months ending in February 2024, revenue was ₹16.5 crore, and PAT was ₹1.5 crore.

The company aimed to raise ₹11.9 crore through its IPO on the BSE’s SME platform, offering 10.24 lakh shares at ₹117 each. This would give the company a market valuation of around ₹31 crore, which is a bold move for a small business with only two outlets.

A Record-Breaking Subscription

Defying expectations, the Resourceful Automobile IPO was oversubscribed 400 times. The retail portion alone was oversubscribed nearly 500 times. This extraordinary response has left many wondering if investors have collectively lost touch with reality. However, Swastika Investmart Ltd, the lead manager for the IPO, believes the enthusiasm is justified by the company’s growth plans.

Expanding with a Purpose

According to Sunil Nyati, managing director of Swastika Investmart, Resourceful Automobile is on the verge of expanding by adding two more showrooms, which has been factored into the company’s valuation. Since there are no direct listed peers in the segment, the company’s future potential is being considered rather than just its current operations.

Nyati also noted that many investors might be looking for quick gains on the stock’s listing day. The Application Supported by Blocked Amount (ASBA) system, where investors’ funds are only deducted if they receive an allotment, encourages more people to apply, knowing their money is safe until the allotment is confirmed.

Red Flags Ignored in the Frenzy

Despite the excitement, there are some concerns. The company plans to use only ₹2 crore from the IPO proceeds to open new showrooms, with most of the funds going to repay debt (₹4.5 crore) and meet working capital needs (₹3.3 crore). The company’s total borrowings were ₹9.9 crore as of February 2024, up from ₹7.47 crore in FY23. Additionally, Resourceful Automobile has had negative cash flow from operations for the past three financial years.

Corporate governance is another issue, as the company is run by a close-knit family. Of the five directors, three are related—Chairman and Managing Director Rahul Sawhney, his mother Bindu Sawhney, and his wife Megha Chawla. These three are also the company’s promoters. One of the independent directors has an unusual career path, moving from being a teacher to an independent director, which raises some eyebrows.

Not an Isolated Case

Resourceful Automobile is not the only SME IPO causing a stir. Earlier this month, Broach Lifecare Hospital, a small hospital in Gujarat, listed on the SME platform. Despite declining revenue and profits over the past three years, its ₹4.02 crore IPO was oversubscribed nearly 160 times. However, the stock’s performance has been a cautionary tale, as it hit the lower circuit for three consecutive sessions after an initial spike.

What’s Driving the Frenzy?

Experts believe two factors are driving the SME IPO market’s current madness. First, many investors are simply chasing quick gains on listing day, without considering the long-term fundamentals of the businesses. Second, there’s a huge demand-supply mismatch in the primary market, leading to nearly every issue being heavily oversubscribed.

As long as these conditions persist, the wild ride in the SME IPO market is likely to continue. But when the bubble will burst is anyone’s guess. Even the smartest minds might struggle to predict when this craziness will end.