The recent enthusiasm surrounding SME IPOs, highlighted by the overwhelming response to Boss Packing Solutions’ public offering, underscores a broader trend of speculative investing in the smaller public market segment. Despite a stern advisory from the Securities and Exchange Board of India (Sebi), which has cautioned investors about the potential pitfalls of investing in these offerings, the appetite for such stocks remains high.
Boss Packing Solutions, a company specializing in the supply of packaging machines, labeling, capping, and filling equipment, recently launched an IPO with a relatively modest issue size of slightly over Rs 8 crore. Remarkably, this IPO was oversubscribed by a staggering 135 times, with total bids amounting to Rs 1,073 crore. This substantial oversubscription is particularly striking given the company's less-than-stellar financial performance. According to the company’s Red Herring Prospectus (RHP), Boss Packing Solutions reported flat profits for the fiscal years 2022-23 and 2023-24. Additionally, the company has faced a significant increase in net debt, rising by 82% to Rs 3.06 crore in 2023 from Rs 1.64 crore the previous year. The company's operations are based in a modest 500-square-yard facility in Ahmedabad, which further adds to the concern regarding its financial fundamentals. Nevertheless, these red flags have not dissuaded investors, who continue to pursue what they perceive as lucrative short-term opportunities.
The fervor for SME IPOs is not confined to Boss Packing Solutions alone. Resourceful Automobile’s IPO, for instance, garnered bids worth Rs 4,800 crore for an offering size of just Rs 12 crore, illustrating a similar pattern of investor enthusiasm. This trend is indicative of a larger boom in the SME IPO sector, with the BSE SME IPO index experiencing a dramatic rise of 136% this year, vastly outpacing the 14% gain of the Sensex.
Experts attribute this surge in SME IPOs to several factors, including high market liquidity, a fear of missing out (FOMO), and increased participation from retail investors. Vaibhav Porwal, Co-founder of Dezerv, explains that while the current trend is driven by liquidity and speculative fervor, investors should be cautious about potential market corrections and regulatory actions that could affect their investments. He emphasizes the importance of focusing on the underlying fundamentals of SME stocks, which could face significant corrections if market sentiment shifts.
VK Vijayakumar, Chief Investment Strategist at Geojit Financial Services, acknowledges the role of SMEs in contributing to India’s economic growth and employment but expresses concern over the recent trend of oversubscribing IPOs of SMEs with weak financials and limited track records. Vijayakumar warns that such speculative behavior often leads to negative outcomes and advises investors to exercise caution.
Prashanth Tapse, Senior VP of Research at Mehta Equities Ltd, also calls for caution, highlighting that while the low prices and small market caps of SME stocks are attractive, the high liquidity and speculative demand could lead to illiquidity after listing. He specifically notes his concerns regarding the extreme demand for the Resourceful Automobile IPO, suggesting that it may reflect underlying issues in market dynamics.
On August 28, Sebi issued a cautionary advisory urging investors to perform due diligence and be skeptical of overly optimistic projections made by companies. The regulator also advised against making investment decisions based on social media hype or rumors, stressing the need for a thorough evaluation of the financial health and business prospects of SME IPO candidates.
In conclusion, while the SME IPO market is currently experiencing an unprecedented surge in investor interest, driven by factors such as high liquidity and FOMO, experts and regulators are highlighting the potential risks involved. Investors are advised to carefully scrutinize the fundamentals of IPOs and consider the possibility of market corrections before making investment decisions. This cautious approach is crucial in navigating the speculative nature of the current IPO landscape and ensuring long-term investment success.
