Navigating India’s SME listings frenzy amidst excitement and caution

India’s SME IPO space is buzzing with excitement, offering investors the potential for outsized returns in a market where companies have delivered 15x to 20x gains in recent years. According to Manas Chadha , Managing Director & Co-founder of Lighthouse Canton 's India business, the SME segment has become a hotbed of activity, “The SME space has seen extraordinary growth, with businesses deeply rooted in the Indian economy and minimal reliance on foreign flows,” said Chadha.

The surge in SME IPOs comes as regulators have created a dedicated exchange for smaller companies, easing access to public markets. While the framework for SME listings has existed for over a decade, this exchange was launched around four years ago to give SMEs an alternative funding route amid the drying up of pre-IPO private funding during COVID. “SEBI doesn’t directly intervene here; the exchange approves offer documents, providing flexibility to promote the startup culture,” explained Chadha.

Unlike larger firms, SMEs are often built on strong fundamentals, with promoters possessing deep domain expertise. However, their financial fundamentals can sometimes be weaker than those of larger, established firms, making them more susceptible to external shocks. Despite this, “Investors recognise this potential, leading to staggering oversubscriptions in many SME IPOs,” Chadha noted. The demand for SME IPOs has been immense, with some issues being oversubscribed by 100 to 200 times. It would be valuable to examine data to understand whether this trend reflects sustained confidence in SMEs' fundamentals or is driven by other market dynamics.

Read the full article here: https://www.lighthouse-canton.com/insights/navigating-indias-sme-listings-frenzy-amidst-excitement-and-caution

Differences Between Main Board and SME Exchange

Opportunities in Mid- and Small-Cap Space

Chadha also highlighted the broader opportunities in mid- and small-cap investments. “Large-cap stocks are often driven by demand and supply dynamics. If there’s selling pressure, even the best-performing stock can’t be protected, as it’s largely dependent on market forces. However, mid- and small-cap counters often show extraordinary growth, with minimal reliance on foreign flows. These businesses are typically very localized or deeply rooted in the Indian economy, making them attractive to investors,” he explained.

Investors are on the lookout for multi-baggers.?

“Investors are more interested in finding the next Amazon early in its growth journey, where they can capture the full revenue potential. This is the current flavour of investments in the SME space,” said Chadha.

He further elaborated on the investment mindset: “If I want to invest in a company like Apple today, I can. But if I find a similar company at an earlier stage—say, in a niche space—and its growth trajectory mirrors Apple’s early days, I can map its potential. If I can invest at a valuation that’s 100x lower, it becomes a compelling opportunity.”

The key, according to Chadha, is execution as it's important to note that SME investments also carry inherent risks. Their localised nature and smaller scale can make them more vulnerable to external shocks, such as demand fluctuations, rising competition, or changes in funding costs, which investors need to carefully assess.

“The ability to execute a vision determines long-term success, whether it’s a large-cap or a small-cap company. Over the last 20 years, only a handful of companies have truly succeeded at their early stages. It all comes down to execution.”

Read the full article here: https://www.lighthouse-canton.com/insights/navigating-indias-sme-listings-frenzy-amidst-excitement-and-caution