From Momentum to Magnificence: Outperforming Nifty 50 index by 40%, the growing SME index

Posted on: May 15, 2023 | By: Kresha Gupta, Fund Manager, Chanakya Opportunities Fund

If you were to guess the best-performing index across the BSE and NSE in the last 10 years, in all likelihood you would be wrong. Often overlooked by investors, it’s the BSE SME IPO Index that has given a stellar performance.

For a developing country like India, SMEs (Small and medium Enterprise) are the wheels that  turn the economy contributing to 1/3rd of India’s GDP. People are investing in these  companies as this will not only help them grow the business but will also help in generating  more employment. The SME Exchange in the country has emerged as a hotbed for  unparalleled growth and investment potential, captivating the attention of HNIs. The appetite  is growing for IPOs of SME companies due to rational valuations, excellent returns and growth  trajectories. S&P BSE SME IPOs Index has delivered an impressive 44% higher returns  compared to Nifty 50 over the past 10 years, indicating the potential for lucrative investments  in small and medium-sized enterprises (SMEs). In contrast, the capital market has almost remained stagnant for the past year, clearly signifying a shift of investors turning towards the  emerging story of India’s SME growth boom.

Going by the Industry data, the past decade has witnessed ~691 companies getting listed on  SME platform of National Stock Exchange and Bombay Stock Exchange*. These companies  collectively raised approximately 100 billion rupees. Notably, nearly 40% of the companies  have migrated to the main board of the exchanges, thereby giving higher valuation and higher  returns to the Investors. In calendar year 2019, only 54 companies launched IPOs on SME  platform (NSE and BSE combined), raising a total amount of around Rs.700 cr. Fast forward to  calendar year 2023, and we have already witnessed over 60 companies raising almost Rs.1600 cr. Out of these 60 companies, 10 companies have even attracted anchor investors  showcasing the impatience of investors to subscribe to SME IPOs. The top four IPOs of this  year have seen over 300 times subscription. The highest demand for SME IPOs has come from  retail and high-net-worth individuals. The success of these IPOs is further buoyed by strong  listing performances. Out of the 53 companies that have already been listed, 75% of the  companies are trading at a price higher than their issue price and around 20% of the  companies have provided returns exceeding 100%.

The cumulative market capitalization of companies listed on SME platform to date is  approximately Rs. 1.29 Lakh crores with the market capitalization of companies currently  listed on SME platform amounting to around Rs.46,000 cr. The Valuation increase since FY  2013 at BSE platform has been approximately 13.12 times while on NSE platform it has been 

around 13.44 times. Indian SMEs have collectively raised more than Rs.2200 cr via IPO route  in FY 22-23 which translated into a growth of more than 100% on a year-on-year basis from  primary markets, through 125 issues. It is projected that nearly 200 companies will go public  on SME platform this year.

There are several factors that contribute to the growth and investment potential of SMEs in  the country’s exchange:

  •  High Growth Potential – SMEs often have greater growth potential compared to large  corporations as they operate in niche markets or innovative sectors. As these  companies currently operate at small scale, they are well connected to their  customers and vendors, providing them an edge over large corporations.
  • Undervalued Opportunities – SMEs may be undervalued or overlooked by mainstream  investors, creating opportunities for astute investors to identify potential gems with  growth prospects. Early-stage investments in SMEs can yield substantial returns as  these companies expand and mature. 
  • Favourable government policies – The government has implemented several  initiatives to support the scaling of SMEs. These policies encourage founders to take  risks and scale their companies by providing tax incentives, regulatory support, and  financial assistance.
  • Digitalization – With the increasing adoption of digital technologies and e-commerce,  SMEs can expand their reach and access new markets beyond their geographical  boundaries, fueling their growth potential

With the SME exchange witnessing a remarkable surge in the listing and performance, these SME companies have defied odds, capitalizing on their agility, innovation and adaptability to seize unprecedented growth opportunities. The fundraising bandwagon is only going to get bigger as more companies from the small & medium segment plan to hit Dalal Street.

In conclusion, “From Momentum to Magnificence” captures the awe-inspiring growth  trajectory of SME exchange listed companies in the country, portraying a landscape brimming  with untapped potential and boundless opportunities. 

*The data is till April 2023. 

* The data has been sourced from BSE and NSE websites.