Unless born to illustrious

parents, all great companies

start life as SMEs !!
Hence, SME Exchanges were started with the intention of allowing
common man to participate in early stage investing
Difference between Main Board and SME
Main Board SME
Min trade Qty 1 Lots ( like FNO)
Results Quarterly Half yearly
Min post IPO capital 10cr 1cr bse, 3cr nse
IPO Document vetting SEBI Exchanges
Minimum # of IPO allottees 1000 100
Market Maker No Yes..initially
Benefits of listing for cos
• Funds, though not main criteria
• Free brand name and publicity worth crores
• Attract talent ( listed co )
• Helps in global tie-ups
• Access to free intellectual capital of investors
• Raising further cash becomes easier
• Also ready currency created for acquisitions

There are also some drawbacks, such as increased compliance costs and reduced
management bandwidth for core business.
Lets compare 2 companies
Co X Co Y
 Revenue 296cr  Revenue 35 cr
 PBT 54cr  EBITDA 3.3 cr
 PAT 26cr
 PAT 1.17 cr

This is the same co

Tasty Bites
Fy18 and Fy08
Stock did 200x
 Mispriced assets available on SME
Industry Software Product PEB Indl Consummables

Revenue 51.54 32.72 60.09

Revenue Growth 10% 20% 28%
EBITDA 15.67 2.08 29.02
PAT 6.79 1.08 19.88
PAT growth 38% 38% 68%
ROCE 28% 16% 24%
Mcap 39 10 211
USP Monopoly product for Building Inventory + cash > mcap Has 80cr cash/ cash
approvals with nationwide equivalent
deployment

All fig in cr for FY18

Things I look out for
• First Generation Entrepreneur with hunger to grow
• Some Niche or USP
• Little or no debt
• Path to double digit margin, if not there already
• Willingness to hire top notch people
• Pricing power
• Big runway
• 3 year plan
• Chance to grow with minimal capex or dilution
• Keep exit in mind
Things I avoid
• Low employee cost
• Small consulting cos
• Cos without niche / Cos that anyone can open
• High debt
• Low Pricing power
• Need continuous capex to grow
 Risks
• Little or no media exposure
• No analyst coverage
• Liquidity risk..Abhimanyu’s Chakravyu
• Long periods of no news
• Buy Sell spread..often 10%
• Large entry/exit leads to huge swings, as high as 50%
• Mortality rate of cos higher in infancy, just as in humans
• Unable to make the jump to smallcap
• Road to institutional ownership is long
• Leap of faith investing, each company has some flaw or the other
I genuinely believe 10% of
SME listed today will
become big multi-baggers.
I also genuinely believe that
upto 50% will vanish.
Hence, Double edged sword
 High Mortality is there even on Main Board IPOs

Year # of IPO Cos that made it big

2007 90 Mindtree, Page, ICRA,

MOSL, Kaveri, Edel

2008 29 V Guard

2009 20 none

2010 59 Jubfood, Persistent, Oberoi

2011 31 Muthoot Fin, L&t Fin

Why most will be unable to make the leap
• Stuck in day to day firefighting
• Hire professionals, but unable to empower them
• No R&D spend
• Low threshold of promoter satisfaction
• Mkt itself is limited
Recommended Strategy
• Think of SME as VC funding
• Invest only that capital which u don’t need for a long time
• Keep strict allocation rules
• Big runway more important than valuation
• Monitor Co, not price
• Chose your co.