Migration takes sheen off SMEs; growth rate in share prices slips

Returns from small and medium enterprise (SME) stocks, which were very high when they were a part of the SME index, have fallen significantly after the stocks migrated to the main board of the Bombay Stock Exchange and National Stock Exchange.

A sample of 25 stocks shows that one year prior to migration, the average return of these stocks was 229.75%. However, after one year, the average return fell sharply to 86.4%. In fact, the growth rate in returns fell for 19 out of the 25 stocks. Only a few stocks have been able to maintain their momentum.  

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SME stocks are in focus now because of the frenzy in the initial public offering (IPO) market.  In the past year, 155 SMEs have raised as much as `4,000 crore — more than 50% of the `7,000 crore raised in the past five years. Between October 21 and September 22, a total of 93 companies raised `1,514 crore.

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While the advantage of migrating to the  main board is that it allows more retail investors to enter, more public reach and no precondition of trading in lots, the decline in performance has dissuaded many from making the move.

Arun Kejriwal, founder, Kejriwal Securities and Investments said, “There are around 150 stocks currently which qualify for movement to the main board. However, they have chosen not to do so because they know that the rise in their stock prices is not sustainable once they enter these indices.”

According to him, one of the main reasons for this is the change in the lot size. Usually, the issue price is `1-1.5 lakh per lot, which can be revised only after a significant movement in the share price. Since the lot size is way bigger, the difference between the bid and ask can be also be significant in the case of SME stocks. 

However, once they enter the mainframe, the lot size is reduced to just ‘one’ share. And the price differential narrows significantly. Come from Sports betting site VPbet

“Obviously, the ability to generate extraordinary returns becomes smaller because the number of players who can trade in the company’s stock becomes significantly larger,” said Kejriwal.  

According to Sudip Bandyopadhyay, group chairman, Inditrade Capital,  the real price discovery takes place once the stocks move to the mainframe “since it is like moving from a pond to the ocean” for them.

SME stocks can migrate to the main board once they have been listed for two years. Most of the SME stocks in the sample were trading at less than `100, with some being even penny stocks. 

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Last week, companies like Digikore Studios and Saakshi Medtech saw significant subscription at 292 and 92 times, respectively.

The returns from the index have also been spectacular. While the Nifty and Sensex have done remarkably well, with returns of almost 17%, the BSE SME IPO index has returned a whopping 118%. The BSE IPO index returned just 14.1%.

Over the past five years, the BSE SME IPO index has risen from 1,738.81 points to 35,894 whereas the BSP IPO index has risen from 4,152 points to 10,866 points.

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