SME IPOs Booming In India, Outperforming Larger IPOs: Versatile Healthcare Advisory Co-founder

In 2024, the Indian SME IPO landscape has experienced significant growth, with numerous companies entering the market, capturing investor attention, healthcare sector being one of them. Speaking to Bizz Buzz, Somenath Chatterjee, Senior Ex-Banker with ICICI Bank, Yes Bank and Co-founder, Versatile Healthcare Advisory, explains the importance and challenges of SME IPO and why investors are particularly interested in healthcare SMEs that focus on telemedicine, diagnostics, pharmaceuticals and mid-sized hospitals

How do SMEs stand to gain from IPOs?

Generally speaking, access to capital is crucial for SMEs to fund their expansion plans, invest in technology, and explore new markets. SME IPOs provide a significant source of capital for these businesses. Going public through an IPO significantly enhances a company's visibility, branding and talent attraction. SMEs that successfully list on the stock exchange gain recognition, credibility, and increased visibility among potential customers, partners, investors and best in class human resources. This increased visibility can open doors to new business opportunities and attract strategic partnerships. SME IPOs not only benefit the issuing company but also offer investment opportunities to retail and institutional investors.

SMEs can enhance their credit rating, corporate governance, financial discipline, branding, and market perception by getting listed. This reduces their risk perception and allows them to raise bank and non-bank debt at a reasonable interest cost. The IPO process also sets the stage for future capital raising through follow-on public offers (FPOs), Qualified Institutional Placements (QIPs), enabling SMEs to grow their business. Besides, listing shares allows SMEs to pledge them as collateral for securing fresh loans, offer stock options to employees, and create shareholder wealth. As India aims to become a $5 trillion economy, SMEs and start-ups will play a pivotal role given their significant economic contribution. There is no doubt that equity investments in Indian SMEs present a major opportunity to help meet this growing credit need.

What are the key challenges, SMEs face while going through the IPO process?

While SME IPOs provide numerous advantages, they also come with regulatory compliance obligations and past 2 years financials. Companies going public need to adhere to various disclosure norms and governance standards. However, the Securities and Exchange Board of India (SEBI) has implemented relaxed regulations for SME IPOs, reducing the compliance burden on small businesses. Timing an IPO is also crucial, and SMEs must carefully consider market volatility and investor sentiment. Fluctuations in the capital markets can impact the success of an IPO.

However, with proper market analysis and expert guidance, SMEs can navigate these challenges effectively. Undertaking an IPO involves significant costs, including underwriting fees, legal expenses, and ongoing compliance expenses. SMEs considering an IPO must carefully assess the financial implications and ensure they have the necessary resources and financial preparedness to handle the associated costs.

How did the IPO market, generally and the SME IPO market, in particular, perform in 2024?

In 2024, the Indian SME IPO landscape has experienced significant growth, with numerous companies entering the market, capturing investor attention. The Indian IPO market has witnessed remarkable growth and impressive returns in 2024. Investors have shown keen interest in both traditional and SME IPOs, with several offerings delivering substantial gains. Moreover, the renewable energy sector has emerged as a standout performer, exemplified by the recent Waaree Energies IPO.

Over the past year, Indian IPOs have generated an average return of 35 per cent, outpacing broader market indices. This impressive performance can be attributed to robust investor sentiment and favourable market conditions. Notably, the technology and healthcare sectors have been particularly strong performers, accounting for 40 per cent of total IPO listings.

Interestingly, SME IPOs have outperformed their larger counterparts in 2024. On average, SME IPOs have delivered returns of 45 per cent, compared to 30 per cent for traditional IPOs. This trend reflects growing investor confidence in smaller, high-growth companies.

Investor sentiment towards SME IPOs has shifted significantly. Many investors now view these offerings as opportunities to capitalise on emerging market trends and disruptive technologies. However, SME IPOs face unique challenges, including limited liquidity and higher volatility, with an average daily trading volume of 50,000 shares compared to 500,000 for larger IPOs.

What would you attribute this to?

The strong performance of SME IPOs can be attributed to several factors. Firstly, many of these companies operate in niche markets with high growth potential, boasting average revenue growth rates of 30–40 per cent annually. Secondly, SMEs often have lean operations and agile business models, allowing for rapid scaling with an average EBITDA margin of 15-20 per cent.

SME IPOs are booming thanks to a mix of government support, investor interest, and strong results across industries.

Significantly, India’s SME sector drives the country’s economy, fuelling jobs, exports, and new ideas. Many small companies show the kind of financial success that investors find appealing. Various government programmes like the Mudra Scheme, tax breaks, and the PLI (Production Linked Incentive) plans have set up a good climate for SMEs.

Another thing to consider is the increasing interest from both everyday and big-money investors. The rich ones and smaller investors alike are seizing the opportunity to make big profits. The BSE SME IPO Index, for instance, has shown a whopping 195 per cent yearly gain over the last 10 years. No wonder SME IPOs have turned into a must-have investment. There is however, a word of caution.

The potential rewards come with significant risks. SME IPOs are more volatile and have shorter track records. This makes them riskier investments compared to the IPOs of larger, more established companies. One must keep in mind that these trends can create a false sense of high returns, pushing investors to buy at inflated prices, which raises red flags about market bubbles and risks to investors. This must be done away with.

How did the healthcare sector perform in the SME IPO market in 2024?

When it comes to SME IPO market, healthcare sector ranked seventh of the top ten performers in terms of returns in 2024. In the last year, India’s healthcare sector saw 11 IPOs, generating a return of 78.97 per cent. The healthcare sector has actually witnessed an unprecedented growth since the onset of the pandemic. As health awareness rises and technological advancements continue to reshape healthcare delivery, SMEs in this sector are poised for significant expansion. Successful IPOs like SAR Televenture, which raised Rs 149.99 crore, exemplify the potential within this industry.

Investors are particularly interested in healthcare SMEs that focus on telemedicine, diagnostics, and pharmaceuticals. The ongoing emphasis on preventive care and personalized medicine further fuels growth prospects. Additionally, government initiatives aimed at enhancing healthcare infrastructure create a conducive environment for SMEs to flourish.

From the start of the year, investors noted that the issue size and the listing gain of IPOs have increased substantially. This surge reflects a broader trend of increasing investor interest in the SME sector, driven by favourable market conditions and supportive government policies aimed at enhancing the growth of small and medium enterprises. The robust performance of these IPOs indicates a shift in investor sentiment, with many looking beyond traditional large-cap stocks to explore the potential of SMEs.

What are the reasons?

The Indian healthcare market, primarily driven by hospitals, pharmaceuticals, diagnostics, and medical devices, and valued at $ 372 billion, is fast evolving. The hospital sector alone is valued at $116 billion and it is expected to grow at a CAGR of 8 per cent, reaching nearly $194 billion by 2032. Interestingly, a significant yet often overlooked contributor to this substantial growth is the mid-sized hospital segment.

The mid-sized hospitals, typically ranging between 50 and 300 beds, and often doctor-owned, contributes 41 per cent—or $37.31 billion—of this market share. These hospitals have become key players in India's healthcare ecosystem, particularly in tier-II, tier-III cities. Their importance notwithstanding, a large number of these mid-sized hospitals face challenges in attracting Private Equity (PE) investment and mergers with larger hospital chains.

They are faced with two-fold problems: Private equity firms typically focus on hospitals with 300+ beds and robust catchment areas, leaving smaller facilities at a disadvantage. Besides, most of the hospital chains prefer M&A opportunities with facilities that have 150+ beds and often require stringent compliance regulations, further limiting access to investment. Given these challenges, SME-IPOs have emerged as a promising alternative for such hospitals to raise capital. It offers them access to growth capital and Competitive Market Valuation and Liquidity. Besides, going public boosts the hospital’s credibility and brand recognition, helping attract top talent, more patients, and even potential strategic partners.

What are the key considerations for a successful SME IPO Listing in healthcare?

I would say, these are: strategic vision of the hospital, stable financials, IPO pricing, reputation of the doctors and hospitals and scope of services offered.

Hospitals also need to look at the EBITDA, Profit after tax (PAT) and free cash flow to the firm as a prerequisite for the valuation and listing requirement.

In short, Mid-Sized hospitals have effectively leveraged SME-IPO to access public capital, despite operational challenges and varying financial performances, reflecting a growing trend among healthcare providers to fuel growth through public markets. This evolving landscape presents an excellent opportunity for hospitals to improve their credibility, achieve liquidity, and secure the necessary funds for future expansion. This trend, therefore, is here to stay.