For a developing country such as India, Small and medium enterprises (SMEs) are the wheels that turn the economy, and SMEs contribute to one-third of India’s GDP. The SMEs have played an essential role in India’s socio-economic development and in globally developed countries such as Germany. In fact, SMEs generate 54.4% of overall value added in Germany and 63.7% of overall employment in the German non-financial business economy.
In India, SMEs constitute a significant segment of the Indian economy and contributes to GDP, industrial growth, employment and exports. Nowadays, people are investing in these companies, which will not only help them grow their businesses but also help in generating more employment opportunities. The appetite is growing for IPOs of SME companies due to rational valuations, excellent returns and growth trajectories, which are well marked.
Nevertheless, this sector is beset with challenges, including a need for adequate and timely credit availability and limited access to equity capital. SMEs have primarily relied on bank finance to meet their working capital requirements, but equity capital has to be brought in by the promoters of the enterprises. They are depending on listing of their companies on exchanges for generating equity capital. The equity capital is also helping reduce debt burden leading to lower operational costs and healthier balance sheets. This segment also faces challenges of regional and national level merchant bankers as still for business in small towns have challenges to identify a right merchant banker is a challenge for them.
Reflecting, Indian growth story unwinds itself, the BSE SME IPO index achieving rockstar status in 2022. On the other hand, the capital market is almost stuck at the same level where it started its journey at the beginning of 2022 with the Sensex at 57,897 and closing at almost 60,910 with an annual return of 6% by the year’s end. Almost the whole of 2022 has been quite volatile in generating returns, making it challenging for investors to choose the best option available. In contrast, an index representing India’s growth story emerged as a clear winner in generating returns. The BSE SME IPO index delivered an annual return of nearly 67% in 2022, beating all other major indices. It has a market cap of Rs 63,898 crore and 410 companies listed in this segment.
It is the stuff of dreams of all the small and mid-size companies who are raising money from the market and participating in the overall economic growth of the country. BSE SME IPO index is followed by the BSE power index but it is a distant second with an annual return of 25%. The third being the BSE PSU index fund and bank indices with a return of 22%.
The BSE IPO index has struggled to deliver a return, while the SME IPO index delivered an astonishing return. It clearly indicates the shift of investors turning to the emerging story of India’s SME growth boom. The domestic and NRIs are finding this segment immensely attractive and putting their bet on this segment. This segment is a must-watch for investors in 2023 as well.
(Lallit Tripathi is the
Founder & CEO at Vedant Asset Ltd. The views are personal.)