As the world sees a slow turn towards stabilizing the global economy in the post-Covid era, the Indian economy has hit a sweet spot with the BSE SME IPO Index delivering the highest-ever return in 2022. Several financing options are available in India are emerging and the local businesses preparing to raise funds from alternative sources to meet their financing needs.
For a developing country like India, small and medium-sized enterprises (SMEs) are the wheels that drive the economy and SMEs contribute to a third of India’s GDP. The SMEs have played an essential role in the socio-economic development of India and in globally developed countries like Germany. In fact, SMEs generate 54.4% of total value added in Germany and 63.7% of total employment in the German non-financial business economy.
In India, SMEs represent a significant segment of the Indian economy, contributing to GDP, industrial growth, employment and exports. Nowadays, people are investing in these companies which not only helps them in growing their business but also helps create more job opportunities. The appetite for SME company IPOs is growing due to rational valuations, excellent returns and well-defined growth paths.
Nonetheless, this sector faces challenges, including the need for adequate and timely availability of credit and limited access to equity. SMEs have primarily relied on bank financing to meet their working capital needs, but equity has to be provided by the founders of the business. They rely on listing their companies on stock exchanges to generate equity. Equity also helps reduce debt burdens, resulting in lower operating expenses and healthier balance sheets. This segment also faces challenges from merchant bankers at regional and national levels as there are still challenges for small town businesses to find the right merchant banker.
India’s growth story continues, BSE SME IPO Index achieves rock star status in 2022. On the other hand, the capital market remains almost at the level where it started its journey in early 2022 with the Sensex at 57,897 closed at almost 60,910 with a 6% annual return by the end of the year. Most of 2022 has been quite volatile in generating returns, making it difficult for investors to choose the best option available. In contrast, an index representing India’s growth history emerged as the clear winner in generating returns. The BSE SME IPO Index delivered an annualized return of almost 67% in 2022, outperforming all other major indices. It has a market capitalization of Rs 63,898 crore and 410 companies are listed in this segment.
It is the stuff of dreams of all small and medium-sized businesses that raise money from the market and participate in the country’s overall economic growth. The BSE SME IPO Index is followed by the BSE Power Index, but comes second with a 25% annual return. The third is the BSE PSU index funds and bank indexes with a return of 22%.
The BSE IPO Index struggled to produce a return while the SME IPO Index delivered an amazing return. It clearly shows the shift of investors turning to the emerging story of India’s SME growth boom. Residents and NRIs find this segment immensely attractive and are betting on this segment. This segment is also a must for investors in 2023.
(Lallit Tripathi is Founder and CEO of Vedant Asset Ltd. Views are personal.)
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