Market Mix - SME IPOs: FOMO Risk For Investors!

Good morning. A recent bike dealership’s IPO whipped up a frenzy being oversubscribed nearly 400 times, largely by retail investors. This isn’t good news. It only highlights the need for investors to exercise more caution, and potentially more regulation for SMEs. Read on to know more. 

In other news, the $8.5 bn Reliance-Disney merger has gotten the greenlight from India’s competition watchdog and scrapping your old vehicle for a new one could get you a discount. 

Correction: In our last edition, while talking about new listings and their current share prices, we wrote about Nykaa's price drop a few days after listing of the stock. We failed to mention the 5:1 bonus announced by the company post listing that resulted in the price adjustment. We thank our readers for pointing out the error.

THE TAKE

Why A Primary Market Problem Is Also A Market Problem

When a two-wheeler dealership with two outlets and 8 employees does an IPO which gets Rs 4,800 crore worth of subscriptions when it wants only Rs 12 crore, something must be wrong somewhere.

The primary market is a part of the stock market. It has always been the case that the secondary market does well, hits new highs and the primary market starts gathering steam.

Usually, this story ends badly, at least for the not sound companies.

While the funds flowing into the primary market are lower, the exuberance there is a direct symptom of what is wrong with the stock markets as a whole. We cannot ignore the signs just because the amounts are relatively smaller.

Further, the most exuberance is clearly visible in the less regulated SME IPO space which is governed by the stock exchanges and not the Securities & Exchange Board of India.

But that does not change the fact that you could take the temperature for fever from any part of the body and it will be the same body and thus the same market. 

It is equally important to revisit everything that is happening in the secondary markets with a fresh lens.

To its credit, the SEBI has done that earlier. For instance, asking mutual funds to do stress tests with their mid cap and small cap funds, asking them to model what would happen if investors suddenly redeemed their units.

Of course, while there is admitted froth in the smaller cap stocks, all of them have subsequently gone even further up to new record highs, like the rest of the market, which also hit a record high yesterday.

SEBI is now cautioning investors against price manipulation by putting out a notice yesterday saying that it has noted that post listing some of the SME companies and / or their promoters have been resorting to certain means that project an unrealistic picture of their operations. 

Such companies / promoters have been seen to make public announcements that create a positive picture of their operations. These announcements are typically followed up with various corporate actions such as bonus issues, stock splits, preferential allotments, etc," SEBI said.

The regulator said such corporate actions create positive sentiment among investors, leading them to purchase these securities. At the same time, this provides promoters with an easy opportunity to offload their holdings at elevated prices.

Urging investors to be careful and watchful of the aforesaid patterns and exercise caution while investing in SME stocks, SEBI said one should not rely on unverified social media posts and not invest based on tips and rumours.

Developed as an alternative source of raising funds for emerging businesses since 2012, the SME platform of stock exchanges has seen amassing funds worth over Rs 14,000 crore in the last decade, of which Rs 6,000 crore was raised during FY24, the ET reported, adding that some SME stocks even doubled on listing day itself till NSE imposed a cap of 90% recently.

We of course need SMEs to be able to access capital but what we are seeing now is an aberration.

One that can shake the entire market if ignored for too long.

Which goes back to the original point. A problem in the primary market, even within the SME IPO segment is a reflection of a problem in the larger market and the exuberance in it. This needs urgent attention.

CO-RELATION

McDonald's Pins Hope On Coffee

For years, Westlife FoodWorld, the McDonald's franchisee in India’s western and southern regions, has been a standout outperformer. Over the past five years, Westlife FoodWorld's share price grew three times compared to a mere 32% gain in McDonald's Corp, US. However, in 2024, Westlife FoodWorld’s share price underperformed US-based McDonald's Corp. That is a first. In 2023-24, Westlife Foodworld saw revenue growth remain relatively flat while the operating profit growth fell sharply. The weakness is likely to continue in 2024-25 too. The company’s management believes the slowdown in consumer discretionary spending has affected same store sales growth. The company relies on a low-priced burger menu and higher sales under the coffee-led McCafe menu. The company does not think food inflation is a problem despite rising food prices. Foreign portfolio investors have increased company ownership, while domestic mutual funds have reduced their holdings

CORE NUMBER

$6.3 billion

This is how much capital Indian startups raised between January and July this year, through 672 venture capital (VC) deals. This is almost a 43% rise in funding compared to the same period last year, according to data and analytics company GlobalData. The growth came even as VC investors remain cautious. Some of the notable deals this year include quick commerce platform Zepto raising $665 million, and e-pharmacy PharmEasy raising $216 million. 

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FROM THE PERIPHERY

—✅ The mega $8.5 bn merger of the media assets of Reliance Industries and Disney India has finally got the green light from the competition watchdog. The Competition Commission announced its approval to the deal subject to the compliance of certain voluntary modifications, which have not yet been specified. The combined entity will have considerable clout with channels across satellite TV and streaming OTT properties. While Disney-Star has the lucrative digital and TV rights to ICC events till 2027 and IPL broadcasting rights till 2028, Ambani’s Jio has IPL streaming rights till 2027. 

—🚘 Looking to upgrade your car? Auto giants are expected to offer 1.5-3.5% discounts when you scrap your old vehicle for a new one. Nitin Gadkari, minister of Road Transport and Highways, announced that manufacturers will offer discounts with a valid Certificate of Deposit. This move will boost the circular economy by getting cleaner, safer vehicles on the roads. On the other hand, Vinod Aggarwal, president of Society of Indian Automobile Manufacturers (SIAM) noted concerns over the scrappage policy's limited impact, despite it already being in place.

—🧳 Religious tourism is a major economic driver in India and globally, with India's spiritual tourism projected to generate US $59 billion by 2028, generating over 100 million jobs by 2030. Talking about international tourists in India, the numbers remain below pre-pandemic levels. Industry bodies blame insufficient international marketing and reduced tourism budget allocations. The Federation of Associations in Indian Tourism and Hospitality (FAITH) and Indian Association of Tour Operators (IATO) note a slight budget increase in 2024-25, yet falls short of boosting global outreach.

—🔋 Tata Motors will reportedly source battery packs for its electric cars from a Chinese manufacturer instead of group firm Tata AutoComp Systems, Mint reported. According to the report, the auto major will source battery packs from US-headquartered Octillion Power Systems, in a bid to address performance issues in older car models. Tata AutoComp Systems has been making battery packs for all Tata EVs, with cells imported from China’s Gotion. The Core earlier reported about recurring issues with Tata’s EV battery. Its latest Curvv coupe SUV will be the first to have the new battery pack. 

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