Why investors are loving SME IPOs?

The SME IPO scene in India has been creating ripples, as a staggering 182 SME brought their POs in 2023. 

In 2023, out of 239 companies hitting Dalal Street, a whopping 182 were SME-led. Here's the kicker – 138 of these SME IPOs are currently trading above their debut prices, making investors grin from ear to ear. And brace yourself, 18 of these IPOs witnessed subscription rates ranging from 100 to an eye-popping 960 times!

According to Trendlyne data, the action has already kicked off this year, as in 2024  as well 40 companies made their stock market debut, and a whopping 75% of them were SMEs

As we approach 2024, the question is whether this trend will continue and why are more and more SMEs rushing towards the public markets. Let's explore what lies ahead.

The surge in SME IPOs can be labeled nothing short of spectacular. The synergy of entrepreneurial zeal and an evolving investor landscape has paved the way for SMEs to embrace the IPO route. 

SMEs contribute a whopping 30% to India's GDP, have a market value of nearly $1 trillion. They're the backbone of manufacturing, making up 36% of the total output. They are projected to double their economic contribution to over $2 trillion by 2024, creating an additional 50 million jobs. 

As India aims for a $5 trillion economy, SMEs are at the forefront. Equity investments in these businesses present a golden opportunity for private equity firms to fuel innovation, job creation, and scaling among emerging SMEs. And hence investors are going gaga over these SME IPOs.

Now, let's dissect the other driving driving forces behind this SME IPO boom:

1. Thirst for Capital: Small and medium companies and traditionally capital hungry and going public allows them to raise capital from multiple investors like institutional investors, private equity investors and retail investors. This flood of funding enables them to expand, invest in research and development, and fortify their market presence.

2. Investor Frenzy: Investors are really excited about SME IPOs, as in the last few years a lot these IPOs have offered multibagger returns to the investors. Both institutional as well as retail investors are eager to invest early in these companies because most of the companies are at a nascent stage and the chances to make high returns on these companies are much higher.

3. Government incentives: In India, the rules and regulations that govern these IPOs have changed to make it easier for small businesses to go public. The government has made the process simpler, introduced measures to protect investors, and created a friendly environment for businesses to launch their IPOs. This has given companies the opportunity to go public and attract investors.

Now, here’s why we can expect the SME IPO boom to continue in 2024

Sustained Investor Interest: The momentum generated by past SME IPO  successes is likely to keep investors intrigued. As long as the market sentiment   remains positive, SMEs might continue to enjoy robust investor support and it is expected that more SMEs would hit the Dalal street with their IPOs in 2024.

Diverse Industry Participation: The SME IPO boom isn't confining itself to a specific sector. With success stories emerging from various industries, expect a diverse range of SMEs exploring the IPO route in 2024.

Government Backing: Indian government has launched various initiatives supporting the SME sector, coupled with IPO-friendly policies, this could act as a tailwind for the boom to persist in the future.

While the outlook for the SMEs seems promising it is important for us to acknowledge the potential challenges associated with them. External economic factors, market volatility, and global uncertainties could influence the trajectory. However, resilience and adaptability have been the hallmarks of the Indian SME landscape.