SME IPOs: Should You Invest?

Small and medium enterprises (SMEs) are the backbone for any developing country. They contribute towards a bulk of the industrial activity in the country and help the economy by improving the Gross Domestic Product.

The current economic condition is clear from the fact that the BSE Sensex is fluctuating – as of today (September 10, 2013) it is up by 1.5% at 19808 on a YTD basis. A volatile economy and a poor GDP growth rate are the major factors behind the disappointing performance of SMEs. The macro-economic conditions coupled with the fact that SMEs typically require a lot of time build a reputation and to grab a decent market share would make the going tough for them overall.

As per our observation, the last 6 SMEs who came up with their IPOs did not show a satisfactory performance. Only 2 of them, i.e. Edynamics Solutions and India Finsec had a promising stock price, and proved their potential in a tough market. The current stock price of these two entities has jumped by 81% and 66% to Rs 45.25 and Rs 16.25 against their issue price of Rs 25 and Rs 10 respectively.

The other 4 issues have seen a bearish sentiment. The share price of Kushal Tradelink surged by a mere 1.57% to Rs 35.50 against its issue price of Rs 35, whereas SMEs like VKJ Infradevelopers, Silverpoint Infratech and Onesource Techmedia have seen their stock prices deteriorating by 16%, 10% and 65% respectively.

Investing in SMEs entails high risks with potentially high returns. However, it is essential that one takes this risk based on sound information derived from the companies’ financial reports and presentations.

Let’s take an example of Esteem Bio Organic Food Processing, a company that has stood out with its performance in these volatile markets. This company was listed at a price of Rs 25 and has seen price rising nearly threefold to Rs 87 since then. It is now looking to raise capital by means of a Rights issue.

However, it should be noted here that this company has failed to submit its quarterly financial reports to the stock exchange. This is surely a compliance issue. The current price even looks sceptical as it is not possible to calculate the valuation of the stock. In fact, how the stock price has moved up merits some looking into.

Our attempts to contact the Company Secretary did not meet with success as the number given on the website was not reachable. In such a case, how can investors take an informed call on the stock?

This company apart, most of the others have actually been value destroyers. This makes a strong case for staying away from such counters.