What could be the biggest bust of 2024?
BSE SME IPO index (black line) has multiplied by about 26 times over the previous 5 years, generating a return of 2,495%. Compare this with the BSE Sensex (orange line), where the corresponding numbers are a relatively boring 2 times, and 99%. The BSE Smallcap index (blue line) has slightly better figures—2.9 times, making for a return of 187%.
So if you were a punter and did not know this was happening right under your nose, you perhaps missed the single biggest investing opportunity of this decade. (The NSE too has an SME market, but we will restrict ourselves to the BSE SME exchange). Before we move ahead, this is how BSE describes the BSE SME IPO index: BSE SME IPO Index is India’s first Stock Market Index for SMEs. The Index is developed with a view to track the current primary market conditions in the Indian capital market and measure the growth in investors’ wealth over a period of time. The Index will be constituted by SMEs listed on the BSE SME PLATFORM. Now that we know what we are dealing with, what’s happening at the SME exchange? Why is there so much interest in it? Well, let’s just say there’s a lot of irrationality.
At a broader level, if I take the data as reported by BSE, the price-to-earnings multiple (a metric of valuation) of the BSE SME index is a lofty 44.5x. The corresponding number for the BSE Sensex and BSE Smallcap? 25.2x and 31.2x. The SME index, which comprises perhaps the riskiest stocks in the capital market, is trading at a huge premium to even the racy smallcap stocks.
That can only be explained by unbridled enthusiasm of investors in the SME market. There’s too much money chasing these tiny stocks. Here is one critical telltale sign—the number of times the IPOs were oversubscribed:
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