SmallCap Spotlight discusses the soaring success of SME IPOs with Aayush Agrawal, AVP – Investment Banking at Swastika Investmart. Aayush sheds light on why smaller companies are flocking to the NSE Emerge and BSE SME platforms, how pre-IPO consultancy ensures they’re prepared, and the changing mindset of promoters post-listing. With a surge in investor interest and impressive subscription numbers, the SME market is thriving. Learn about the key factors behind this boom and what investors should watch out for!
Mubina Kapasi: Aditya Ultra Steel, TB Icon, if you’ve been tracking the SME markets and the IPOs, chances are that you’ve heard of these companies. Why? Because their subscription numbers have been through the roof. And I have with me one person or one of the people who has been responsible behind this, the investment banker.
Because the investment banker does have a large role to play behind these SME companies and their successful listing. What is causing SMEs to hit the market? As investors, what should you be aware of? What are the red flags? I have with me Ayush Agarwal, he is the Assistant Vice President for Investment Banking with Swastika. Ayush, it’s lovely having you with us today.
And let’s start off first with the reason behind all these SMEs really wanting to hit the primary markets to raise money. What do you think has caused this? Because while these two platforms, the NSE Emerge and the BSE SME have been around for a while, it’s in these last two odd years that there’s been a flurry of activity.
Aayush Agrawal: I think that’s a very good question. And I think this platform by NSE and BSE was started back in 2012, wherein they provided small size companies who don’t have access to easy equity to get listed on these exchanges, wherein they have a very easy listing criteria for them majorly being profitable. And then other than that, they have an option to raise equity, because usually private equity firms work out in higher ticket size investments for larger companies, for startups, there’s venture capital, angel investors. But for these traditional manufacturing trading companies who’ve been doing business for 20, 30 years in the past, maybe 10, 20 years and don’t have easy access to equity, more of a traditional business, there was no platform such that which was started by the exchanges, which now has peaked in the last recent years because multiple companies have grown in the business because their valuation upside, their revenue profitability can grow multiple when they have easy access to capital.
Because debt cake limitations which cannot be met all the time, and a company cannot get debt very easily from the banks and BFCs, which is a very high rate. So this easy access to equity has helped these companies grow. Moreover, you know, being listed, these companies get recognition worldwide, if they’re doing an export oriented business, they have easy client trust, basically on them, and they’re able to grow their business multifold by doing that.
And moreover, once you get listed, you know, your entire working style changes, you become more regulatory focused, compliance focused, you do the business on behalf of stakeholders, shareholders, you have a responsibility on your hand. So your perception and style of working changes, which helps you grow your business a lot in the future.
Mubina Kapasi: Now, I see that you’ve worked with, I think more than 30 companies. Correct me if I’m wrong, it’s been around 30 companies that you have worked with and helped them go to the exchanges, you’ve got many years of experience.
So tell us, what is it that you have observed in terms of the attitude of these companies earlier when they used to hit the exchanges versus now? Do you think that companies today are better prepared to, you know, face that public scrutiny that comes along with listing?
Aayush Agrawal: Yes. Earlier, I think back in 2016, 2017, a lot of SME companies had come in, which were not that compliant, per se, there was a boom in the market. But then the companies were not that compliant.
And they didn’t have an understanding of what being a listed company is and following the compliances, which led to the slowdown maybe in for a couple of years. And then after that, the market again picked up with a more robust mechanism for compliance for these companies. Usually, what happens is these smaller companies initially are not very compliant, per se, because they’re doing a business, it’s a family oriented business, they don’t have a lot of, you know, opportunities initially, they’re not exposed a lot to good consultants across the country.
What these SME IPOs help them is, you know, make them very process oriented, compliant, forward, focusing on showing maximum profit in the books, keeping them coming ahead. So earlier, these challenges were there, which nowadays, I think are being met out by, you know, proper consultancy and knowledge to these companies. And even promoters, I think after the next generation, since a lot of companies have kicked in, into the business, they’ve done their courses from top of these schools, and they understand what, you know, how financials, compliances, growth, and which helps these companies grow.
Mubina Kapasi: Now, of course, before you list, there are certain things that have to be done, you have to get your house in order. And I see that one of the services you offer is something called a pre IPO consultancy. Tell us what goes behind that? How do you essentially prepare the company, you know, before they list themselves? What does it entail as a pre IPO consultancy?
Aayush Agrawal: Pre IPO consultancy in the sense helps these companies get ready for getting listed, you know, help them make the processes a company needs a listed company needs, improve their financials, help them in capital restructuring, when you know a lot of companies, maybe they’re working, they’re having two, three different businesses in two, three different companies.
So we consolidate those companies together, make a holding subsystem structure, improve their business practices, see where the money, you know, cost is lacking, your cost is getting weak, or it’s getting expanded. So reduce, improve their profitability. Along with that, improve their compliances, help them, you know, improve their board, basically hire a good board of directors who can keep a check on the promoters, their businesses, even they have to then report to the board.
So it puts a pressure on these promoters as well, then have a full time company secretary, financial person, help them get hired by this person, because at Swastika, we have full time HR consultancy service as well. So we had them hire good team members as well. So this overall basically helps these companies, you know, in terms of a pre IPO preparedness for the listing.
Mubina Kapasi: You know, since you do this consultancy, I’m sure over the years, you may have advised some companies that, hey, listen, hold on, you still need a lot more work, you know, before you go to the market. So if you could share some of those signs, you know, which you felt came out when you were working with a company, and you sort of warned them that, hey, listen, maybe you’re going on the buses a bit too early. So if you could share some of those signs with us.
Aayush Agrawal: Technically, the SME platform is made such that, you know, smaller companies, even very small companies can get listed. Such as the idea for this platform that small to small companies can get listed, there is no minimum criteria as to the IPO size. We have seen cases where the IPO has been for 3 to 4 crores, 5 crores, 10 crores, etc.
So in terms of, but you know, size wise, it doesn’t matter if the company is early, the company should have a proper process to maintain their business compliances after getting listed. They should have a mentality that, you know, once they’re getting listed, they have taken money from equity shareholders outside their company, which are not promoters. And then they have to fulfill that responsibility towards them.
So once the company, you know, understands that concept and they start focusing. So I think everything goes for the benefit of all stakeholders. Otherwise, if the promoter has not, doesn’t have that intent to grow that business and you know, you’ve taken the money, you’ve taken your personal cars, you’ve used their money somewhere else.
So that doesn’t go well with the investors and the future of the company. So that kind of maturity should be there with the promoters.
Mubina Kapasi: A follow up question – If a company, like you said, is raising 4, 5, 6 crores, don’t you think the compliance costs of listing are very high? Because as an investor, then even I will think that this company is raising so much money, then is it even worth listing? You know, because the amount of compliance is because SEBI comes in, all these regulations come in, don’t you think that the compliance costs are way too high then?
Aayush Agrawal: Absolutely. So in terms of SME, I think the compliance cost per se is not that much in terms of if you see the overall compliance cost, including a basic, you know, documentation fees, exchange related fees and intermediary fees will be somewhere to the range of 50 lakh rupees. Now, that becomes the compliance and then the marketing part, which can definitely vary from case to case basis.
So if you’re bringing an IPO to the tune of 5, 6 crores, I think compliance cost definitely as a percentage becomes a larger amount. But then as compared to main board IPOs or larger other IPOs, this compliance cost is usually less.
Mubina Kapasi: You know, I’m seeing some of the companies you’ve worked with and superb subscription numbers. I think one of the success models or factors to gauge whether an IPO has been successful or not is firstly, and secondly, maybe the listing day gains. And most of your companies have done very well on listing day. So what are those, you know, what goes behind making a company’s IPO go successful?
Aayush Agrawal: When we’re doing a pre-IPO preparedness for these companies, that helps them, you know, improve their compliances, their team for the future, get ready for the IPO, improve their capital structure.
Definitely that goes, the work that we do behind definitely helps these companies get successful, you know, later stage after the IPO as well. And in terms of the IPO, what we do is basically the company is having a very good financial growth. If it’s bought at a very right valuation, which is a win-win for the company, as well as the investors, then the investors feel that they have something there to grow in the business.
So definitely they have an interest and once that investor interest develops, so the IPOs get subscribed multiple times. Apart from that, I think one of the companies that we did was TBI Kwan, where we did a pre-IPO round and then we brought in Ashish Kacholia, who was a very good ACE investor. So when people like these come on board of these companies in pre-IPO stage, that creates a very fancy market.
It definitely gives the company a boost, it develops a trust between the investors that, you know, there is a growth potential in the company, which helps these companies get subscribed multiple times and, you know, derive a hefty listing gain.
Mubina Kapasi: Now, as a merchant banker, there’s this exercise of, of course, pre-IPO consultancy, which you conduct anyway. But in many ways, you may also become the face of the company, especially, you know, when they’re doing roadshows, etc. you know, for the IPO. So as a merchant banker, if you could tell us apart from pre-IPO, what are the other roles you take on to try and ensure that this company’s IPO goes through and it’s successful?
Aayush Agrawal: In terms of investor awareness, investor relations, we help these companies a lot when the company is fundamentally good and has a very good growth potential. A lot of good investors in the market and these marketing names are always interested in investing because they like, they keep scouting for these companies, which, you know, they can help technically more than the money they can support these companies basically to grow.
So we’re very well connected to these kinds of investors. So it acts as a win-win for both, for the investor segment, they create their money, they create their value, and even the companies because they benefit out of this. So apart from just the investor segment, we do the entire due diligence for the companies, helping their valuation, compliance aspect.
And as a merchant banker, you have to definitely underwrite the issue and market it from end to end. So what goes is the right PR activities that have to be done, the advertisements, the marketing. A lot of times we do investor meetings as well to, you know, support these companies during the IPO phase.
Mubina Kapasi: Now, I know you spoke about this briefly in one of your previous answers, but from a morale perspective, I want to know that for the upper management, for the employees, how does listing, you know, change their morale?
Aayush Agrawal: Once a company gets listed, there is a massive shift in the thought process of the promoters and the companies, right? When you are an unlisted small company, you’re actually just doing internal work, you’re not basically answerable to anyone. For management, once the company gets listed, you know, you have to attend quarterly earnings calls, your half yearly earnings call, you have to submit your financials every half year. Then you create a board of directors, wherein you hire independent directors from outside.
So even the top management has to answer to them. So then they work in a very professional manner to maybe help the company grow in terms of employees, you know, employees, they have an option of employee stock option plans, ESOP schemes, etc, wherein they get some equity stake in the company. So once they get some equity stake in the company, you know, definitely they are working more for the valuation growth of the company and they feel that they’re part of the company’s growth.
So their productivity by default increases. So, and then you start comparing yourself to the larger listed companies on the main board or other platforms. And you try to achieve that level of efficiency and growth. So overall, that helps boost the morale and targets of the company entirely.
Mubina Kapasi: Now, you’ve always sat on the company’s side of the table, but I want you to move over to the investor’s side of the table. Because investors have been putting in a lot of money behind these SMEs. What according to you is the reason behind this?
Aayush Agrawal: In terms of the subscription numbers, what happens is usually the, see, India’s investor base is huge. And in terms of the size of the IPOs, these are very small ticket size IPOs as compared to, you know, 10, 20, 30, 40 crore IPOs. So getting a multiple subscription becomes easy because the market is so huge.
In terms of main board, the IPO size itself is basically somewhere in 200, 300, 500 crore as a normal range for an IPO. So maybe if an IPO of 55, 20 crore is there in SME, it’ll get 10x or 20x more subscription to the main board because of the size being smaller. Secondly, SME has given very good returns to investors in the past few years.
Because when you’re a small company, to make that jump in revenue and profit is easy once you have that capital you need to boost your business. Because these are very companies in a very good growth stage. Usually main board pay companies become more of a value stage companies where they have reached their accelerated growth and they will grow at a normal pace nowadays.
In SME the companies grow at an accelerated pace within 30, 40, 50% growth rate is normal for these companies. And hence that return is higher. So if you see in FY23 usually I think the SME platform witnessed 1.7x higher returns than main board IPOs. Great QIB investors, anchor investors have come in and started investing in SME that has led to a drastic increase in retail investors.
Mubina Kapasi: So also the kind of investors who are putting money I mean usually it’s your HNIs or your QIBs now it’s even retail investors so the mix is also changing.
Aayush Agrawal: Absolutely, retail is also increasing and moreover after the introduction of ASBA where you know the amount is blocked in your own account and it’s not deducted and transferred to someone else’s account until and unless you have the subscription.
And moreover that blocking time period has reduced to 3 days now from 6 days. So investors’ liquidity is not impacted when they are investing in such companies. So definitely they don’t mind trying to just, you know, invest in SME IPOs or main board IPOs because money is just getting blocked in the car and it gets unblocked in 3 days. So those types of liquidity increases so investors feel that they can invest more in SME companies.
Mubina Kapasi: That’s a great point actually. Convenience is something that’s just pulling on retail investors you know towards finding all those different investment avenues and SMEs is one of them. Ayush, it was lovely chatting. Thank you so much for joining us today on Smallcap Spotlight.