blog/article-blog/Comparison of SME IPO vs Small Caps: How to benefit?

May 9, 2024

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Comparison of SME IPO vs Small Caps: How to benefit?

Small-cap equities and small and medium-sized businesses (SMEs) might present profitable options for investors looking for portfolio development potential. Making wise investing decisions and optimizing profits, however, requires an awareness of the distinctions between small-cap stocks and SME IPOs.

1. SME IPOs: Revealing Promising Ventures: SME IPOs offer a chance to invest in early-stage businesses that need money to support their expansion and growth strategies. These businesses may be involved in new industries or specialized markets and may have a lower market value.

Historically, 493 companies have been listed; 180 of those have moved to the mainboard. As a result, 310 SME businesses are currently listed on the exchange.
es (CAGR) over a period of six years, reveals an intriguing trend: on a Median CAGR Gains basis, Small and Mid-sized Enterprises (SMEs) have routinely outperformed well-known benchmarks such as the Nifty 50 and the Nifty Small Cap 100.

Upon closer inspection, the absolute CAGR median gains for SMEs over the previous six years have been 14%, whereas the corresponding figures for Nifty Small Cap 100 and Nifty50 are 9% and 13%, respectively.

The possibility for significant financial appreciation is one of the main benefits of participating in SME initial public offerings. Early investors in profitable initial public offerings (IPOs) stand to gain a great deal as the business expands and hits milestones. Additionally, investing in SME IPOs enables investors to back entrepreneurial endeavors, promote job creation, and boost economic development.


However, it's critical to understand the dangers that come with SME initial public offerings (IPOs). For example, these businesses might possess:

1. Brief history of operation

2. Unproven business strategies

3. Increased volatility in contrast to well-established enterprises

Therefore, before making an investment in SME IPOs, careful due diligence and risk evaluation are essential.



2. Small-Cap Stocks: Investigating Prospects for Growth: Conversely, small-cap stocks are publicly traded businesses having a market capitalization of less than ₹21,000 crores. Small-cap stocks have a stronger growth potential than large-cap stocks, even though they might not be as early-stage as SME IPOs.

The top 5 Small Cap Stocks performers over the previous 5 years are as follows:


1. Insolation Energy Limited: Insolation Energy had an absolute gain of 4,505% and a CAGR of 2189% since listing, respectively. The company went live on the SME Exchange in October 2022 at an issue price of ₹38. As of right now, it is trading at ₹1,740.

2. Knowledge Marine & Engineering Works Limited: This company was established in March 2021, with an issue price of ₹37. As of right now, it is valued at ₹1,259, indicating an absolute gain of 3,302% & a CAGR of 1034% since listing respectively.


3. Advait Infratech Limited: Currently listed at ₹1,426 and having gone live in September 2020 at an issue price of ₹51, Advait Infratech Limited has recorded an absolute gain of 2,696% and a CAGR of 699% since listing.


4. BEW Engineering Limited: The company debuted on the SME Exchange in September 2021 at an issue price of ₹58. As of right now, it is trading at ₹1,550, having gained 2,572% in absolute terms and 9699% in compound annual growth since listing.


5. Kotyark Industries Limited: Since becoming live on the SME Exchange in November 2021 at an issue price of ₹51, the company has grown by 2,115% absolute and by 786% CAGR. It is currently trading at ₹1,130.


In a similar vein, a six-year analysis of the data leads one to conclude that smallcaps have grown at a somewhat greater rate, both absolute and compound annual growth rate. For example, during the last five years, the Nifty Smallcap has grown at a 19% compound annual growth rate (CAGR) compared to the 15% CAGR growth of the Nifty50. to market fluctuations


Purchasing small-cap stocks exposes investors to innovative businesses that might beat the overall market. These businesses can be involved in quickly expanding sectors of the economy or have cutting-edge products or business strategies. Furthermore, analysts and institutional investors typically study smaller-cap stocks less closely, which presents an opportunity for investors to find hidden treasures.


Small-cap stocks do, however, carry a unique set of dangers. As an example, they could be:
1. More vulnerable to market fluctuations
2. Liquidity constraints
3. Operational challenges compared to larger, more established companies

Furthermore, the lack of analyst coverage and information transparency can make it challenging to assess the true value and growth prospects of small-cap stocks.


Maximizing Returns: What are the Strategies to Consider?:

To benefit from both SME IPOs and small-cap stocks, investors should adopt a balanced approach and diversify their portfolios. Here are some strategies to consider:

Thorough Research: Conduct comprehensive research and analysis before investing in SME IPOs or small-cap stocks. Evaluate the company's business model, competitive advantages, financial performance, and growth prospects.

Risk Management: Manage risk by diversifying across multiple SME IPOs and small-cap stocks. Avoid putting all your eggs in one basket and maintain a well-rounded portfolio with exposure to different sectors and industries.

Long-Term Perspective: Take a long-term view when investing in SME IPOs and small-cap stocks. Focus on companies with strong fundamentals and sustainable growth potential rather than short-term market fluctuations.

Active Monitoring: Stay informed about market developments, industry trends, and company-specific news. Monitor your investments regularly and be prepared to adjust your portfolio based on changing market conditions.

Seek Professional Advice: Consider seeking advice from financial advisors or investment professionals with expertise in SME IPOs and small-cap stocks. Their insights and guidance can help you navigate the complexities of the market and make informed decisions.


In conclusion, both SME IPOs and small-cap stocks offer unique opportunities for investors to capitalize on growth potential in the market. By understanding the differences between these investment options and implementing sound investment strategies, investors can position themselves to benefit from the dynamic and evolving landscape of small and medium-sized enterprises.

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