High Demand for SME IPOs: Investors Flock to Early-Stage Opportunities, Driving ₹1.60 Lakh Crore in Bids for August Listings

The growing interest in SME IPOs is one of the major trends in the financial markets this year. Attracted by the potential for high returns and the chance to invest in companies early in their growth, more investors are flocking to these IPOs than ever before.

A Shift in Investment Strategies

This surge in SME IPOs reflects a broader change in how investors are approaching the market. Both retail and institutional investors are diversifying their portfolios by betting on companies that could become industry leaders.

Higher Risk, Higher Rewards

Unlike larger IPOs, which usually attract more conservative investors, SME IPOs are drawing in those willing to take on more risk for the possibility of rapid growth. However, despite concerns about the long-term value of these IPOs, the demand from investors has been overwhelming. This has led to debates among market experts, who are questioning whether this enthusiasm is sustainable.

Concerns of a Speculative Bubble

Some experts are worried that many investors are not fully evaluating the long-term prospects of these companies, which could lead to a speculative bubble. They caution that the current excitement may be driven more by a herd mentality and the desire for quick profits rather than a solid understanding of the IPOs’ true value.

August’s Record-Breaking SME IPOs

In August alone, 25 SME companies launched IPOs, raising a total of ₹647 crore. The total bids for these IPOs soared to ₹1.60 lakh crore, showing just how eager retail investors are to get involved in this market segment.

Oversubscription Frenzy

Despite multiple warnings from SEBI, retail investors continue to pour money into SME IPOs. It’s becoming rare to see an SME IPO that isn’t fully subscribed in the retail category, with some even reaching up to 2,000 times oversubscription.

For example, the IPO of Resourceful Automobile was subscribed 400 times, receiving bids worth ₹4,000 crore against an offer of just ₹12 crore. Some experts were surprised by this level of enthusiasm, given that the company only operates two Yamaha showrooms with a small staff.

SEBI’s Concerns Over Market Practices

This enthusiasm for SME IPOs continues despite concerns about unrealistic valuations and questionable practices in the market. SEBI has warned investors about some SMEs making overly optimistic projections and engaging in tactics like bonus issues and stock splits to create a misleadingly positive image of their operations.

High-Growth Sectors and Valuation Trends

High-growth sectors like technology and pharmaceuticals are often valued higher due to their future potential, while traditional industries may see more modest valuations. The success or struggle of recent IPOs can also influence the market’s mood and the valuation of upcoming IPOs.

Simplified Valuations on the SME Exchange

On the SME exchange, valuations are typically simpler, often ranging from 10 to 15 times profit after tax (PAT), with the discounted cash flow (DCF) method generally not applied to SME IPOs.