Explore the Potential of SME Investments

SMEs play a very important role in the economy of any country, and it is more so in a developing country like India. The function of small and medium enterprises in the economic and social development of the country is well established as it contributes almost 40 per cent of the gross industrial value added to the Indian economy.
 

SMEs are businesses that maintain revenues, assets or a number of employees below a certain threshold. Though large firms generally tend to outnumber SMEs, these small and mid-sized enterprises play an important role in the economy by employing vast numbers of people across various sectors and helping to shape innovation. Hence, to boost the presence of SMEs, governments regularly tend to offer incentives to keep up with business in normal as well as difficult times. [EasyDNNnews:PaidContentStart]

An SME IPO is a way for a privately owned small and medium enterprise (SME) company to sell its shares to the public for the first time and gets listed on BSE SME or NSE Emerge platform. Companies with minimum post-issue capital of ₹ 1 crore and a maximum of ₹ 25 crore are eligible for SME IPO in India. 

The growing number of SMEs generally is a positive indicator of improving business activity in an economy. Currently around 435 companies have been listed on the BSE SME platform till the end of May 2023, with a total market capitalisation of around ₹ 66589 crore. 172 companies of the 435 have migrated to the main board. Despite a difficult year (FY23), SMEs seem to be recovering well by almost being back to the pre-pandemic levels. A bunch of SMEs reported exceeding their revenue targets even during the tough times. 
 

This is reflected in their performance.
 

Investing in SMEs holds significant importance, as highlighted by the performance of the S&P BSE SME IPO index compared to other indices. 

The S&P BSE SME IPO index has delivered a remarkable total return of 43.64 per cent since the start of the year 2022. This indicates the potential for higher returns and growth in SME investments compared to other indices. Over the past six months, the SME IPO index has outperformed other indices with a return of 22.89 per cent. This demonstrates the growth potential and value that investing in SMEs can provide. The one-year performance of the SME IPO index stands at an impressive 95.69 per cent. 

Although SME investments are subject to volatility and risk, with a maximum drawdown of -43.15 per cent, it's important to consider that the potential for higher returns often comes with increased risk. Proper risk management strategies and a longterm investment approach can help mitigate these risks. 

Although SME investments are subject to volatility and risk, with a maximum drawdown of -43.15 per cent, it's important to consider that the potential for higher returns often comes with increased risk. Proper risk management strategies and a longterm investment approach can help mitigate these risks. 

Based on our analysis, investing in SMEs can offer the potential for higher returns and growth compared to other indices. However, it's important to carefully evaluate risks and conduct thorough research before making investment decisions. Diversification and a long-term perspective are recommended to navigate the inherent volatility associated with SME investments 

SMEs belonging to a wide range of sectors like IT, automotive components, pharmaceuticals, infrastructure, and hospitality strive to gain more brand image, improved credit rating, easy financing and growth opportunities. Hence, to encourage the equity culture among SMEs, BSE continues to take proactive measures to create awareness about the advantage of equity funding. 

Methodology 

To come up with a list of top-ranking SME companies, we compiled data for all the SME companies listed on the BSE based on five crucial parameters. The first includes market capitalisation. The remaining parameters are obtained from the Profit & Loss Account and include Sales, Operating Profit and Net Profit. We have considered growth on a 3-Year CAGR basis when looking at these criteria. In addition, we also considered the PAT margin for ranking the stocks as it indicates how efficient a company has been in converting the given sales into profits. Each parameter was then ranked by awarding it a carefully determined weightage based on its significance. All the raw financial data is sourced from Ace Equity and price-related information is as of April 28, 2023.
 

Click here to download List of top-ranking SME companies  

 

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