Why SME IPO investors need extra caution in weak stock market — explained

Following the consecutive discounted listings of three mainboard IPOs and subdued trends in the secondary market, investors are seeking foolproof methods to safeguard their investments. Manish Chowdhury, Head of Research at StoxBox, discusses with Asit Manohar of Mint and introduces a ‘small is big’ strategy for primary market investors amidst the current situation. Below are the edited excerpts:

After back-to-back discounted listings of three mainboard IPOs, do you think the Indian primary market is losing its sheen?

We sense that the IPO listing is closely linked with the sentiment prevalent in markets. The broader markets have been under pressure this week and it was evident in the discounted listing of these stocks. We believe that market participants have slowly begun to realize that company fundamentals and valuation are paramount in the long-term performance of the company.

How much role of SEBI’s concern over froth building play in the weakening of the Indian IPO market sentiments?

From a fundamental perspective, we sensed that the rally in mid and small-cap space in the last one year had driven stock prices way ahead of their revenue visibility and some pockets had become extremely overheated. SEBI’s comment over the froth building up in the mid and small-cap space did provide a reality check to investors, leading to a sharp correction in the space which also translated into the underperformance of the recent listed IPOs.

Looking at the current trend in the secondary market, do you believe the T+3 listing is beneficial for the IPO investors?

The decision of SEBI to reduce the time of listing from six days to three days from the date of issue closure is a step in the right direction. The decision will benefit both the issuers as well as investors as the former would receive funds early while the latter would get credit of securities in their demat account in a shorter time frame. Moreover, the unallotted investors in the issue would benefit from a quick refund of the applied amount. We feel that the decision is aimed at benefiting all stakeholders involved in the IPO process by enabling them to optimally utilize their available resource pool.

What are the extra cautions you suggest for SME IPO investors?

The splendid returns of the SME stocks, especially on their listing day, have garnered huge interest from market participants which has translated into SME companies timing the upbeat investor sentiment. However, we caution investors to understand the risk in SME stocks due to the larger lot size, less liquidity, small scale of company operations, and limited financial performance track record.

Booking profit in a newly listed stock becomes difficult if the listing happens at a higher premium. What is your take in this regard?

Most of the time when the stock lists at a robust premium, the company starts trading at a significantly higher valuation which becomes difficult to justify. Our advice would be to book profits at higher levels and wait for the company to prove its merit on business and financial performance in the next few quarters before considering it worthy to invest.

What kind of risk management you would suggest to an investor in the current primary market condition?

“Small is the new big” is an apt adage for IPOs as they have generated tremendous responses from the investor community, mostly aided by the prevalent upbeat market sentiment. It has been a win-win situation for both sides of the story; companies getting easy access to the required funding and building brand awareness, whilst investors generate handsome returns on their investment and being part of an early-stage investment in high-growth companies. Though IPO issues look lucrative, we advise investors with long-term perspectives to venture into these due to the smaller scale of operations of these companies. We advise that investors should not get carried away with the past IPO performance as it was also supported by strength in the broader markets and objectively evaluate each issuance based on fundamentals.

Disclaimer: The views and recommendations above are those of individual analysts, experts, and broking companies, not of Mint. We advise investors to check with certified experts before making any investment decisions.SEBI

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Published: 16 Mar 2024, 01:50 PM IST

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