This is almost a complete inversion of most of the frenzied gains seen in the last few years. Further, as many staggering 86% of listed SME stocks delivered negative returns to investors in the three month period from the peak.
From FOMO to fallout
What began as a dream run — with multibagger gains and oversubscription headlines dominating news — has turned into a sharp reality check for investors. Consider this: At least a quarter or 25% of stocks in the SME universe have fallen 30% or more.
The negative sentiments are also visible in the grey market, where premiums are almost wiped out now. The subscriptions for the IPOs are not exceeding 10x.
SME stocks have seen a correction recently due to several factors. But the broader market volatility and correction is one of the biggest factors. The Indian equity market has experienced a correction, with the Nifty50 down more than 14% from its September peak.
This overall market volatility affected SME stocks significantly due to their inherent volatility and lack of institutional support. The stocks also had stretched valuations, which led to sharp corrections when market sentiment turned negative. The recent correction was also partly due to these valuations being unsustainable in a slowing economy.
SME stocks typically lack significant institutional backing, making them more susceptible to market downturns. Without strong institutional support, these stocks can experience rapid declines during corrections.
“Recently, the broader market has been impacted by global headwinds, stricter monetary policies, and widespread investor caution.
SMEs are particularly vulnerable to market corrections because of structural problems such inadequate liquidity, poor corporate governance and high operational risks,” said Rajesh Sinha, Sr Research Analyst at Bonanza Group.
The market has also become more disciplined as a result of recent changes that have raised the minimum application size to Rs 2 lakh,
mandated profitability requirements, and limited the offer-for-sale (OFS) to 20% of the issue.
By ensuring that only financially sound SMEs join the public market, these policies aim to increase investor trust over the long run.
Experts also say the sharp decline thus highlights the need for better risk management and increased transparency in this sector and is a result of a combination of macroeconomic forces and intrinsic flaws in the SME market.
However, the future looks bright for SMEs preparing for IPOs later in the year thanks to increased transparency and quality. “Market players anticipate that the SME IPO category would progressively regain its credibility and momentum with better corporate governance and due diligence, assisting entrepreneurs as well as the larger Indian startup ecosystem,” said Sinha.
(Disclaimer: Recommendations, suggestions, views and opinions given by the experts are their own. These do not represent the views of Economic Times)
