Today’s small and medium enterprises (SMEs) are tomorrow’s midcaps or largecaps in the making.
They are fast emerging hunting grounds for yield-hungry ultra-rich investors, and even some mutual funds, as an indecisive stock market dries up options in the mainstream market.
Available data shows several well-known names and value investors from Dalal Street, including the likes of Ramesh Damani, Anil Kumar Goel, Nikhil Vora, Kenneth Andrade and Madhusudan Kela, have been busy picking up stakes in SMEs in recent times.
SME platforms run by domestic stock bourses BSE and NSE have in recent times thrown up many a gem, some of which have delivered mouth-watering returns to investors in last six months.
For instance, supermarket chain manager Aditya Consumer Marketing delivered nearly 300 per cent return in just six months; while others like Meera Industries, Lancer Container Line, Loyal Equipments, R&B Denims and Prabhat Telecoms have more than doubled investor wealth in the six months till April 25, 2018.
SME stocks present a wide variety of opportunities with high growth potential, and hence, they have emerged as attractive portfolio diversification tools, says Mahavir Lunawat, Group Managing Director at Bandra, Mumbai-based Pantomath Advisory Services Group.
By nature, SMEs are small in size, and can be brought at relatively lower valuations at an emerging stage.
Given the large business growth potential and smaller market capitalisations, some of these are tailor-made opportunities to deliver handsome returns. Even domestic mutual fund managers have started tracking this space closely. Alternative investment funds are investing in them at both primary and secondary levels, Lunawat said.
Data available shows several instances where market veterans have taken good exposure to select SME stocks.
Structured data solutions provider IRIS Business Services, which got listed on the BSE SME platform in October, 2017, has Madhuri Kela among key investors holding over 5 per cent stake. Madhuri is the wife of Madhusudan Kela, a Dalal Street veteran who recently quit the Anil Ambani-led Reliance Capital as chief investment strategist. The stock traded at Rs 54.80 on April 30, 2018, up more than 60 per cent from its listing price of Rs 35.35.
Renowned investor Anil Kumar Goel held over 2 per cent stake in bullion trader OP Chains as of March 31, 2018. The company’s core business comprises trading of gold, silver and other precious metals. The stock is, however, down over 40 per cent since the beginning of this calendar in the wake of multiple loan scams in the industry.
Value investor Vijay Kedia figured among the top ten shareholders in the draft red herring prospectus of Innovators Façade Systems. He was holding 11,29,032 equity shares on the date of filing of the DRHP.
Nikhil Vora, former star analyst at IDFC Securities, held 1.24 lakh shares, or 1.19 per cent stake, in luxury salon and spa operator Sanghvi Brands as of March 31, 2018.
Sixth Sense India Opportunities II, a fund Vora promotes, fully subscribed to the entire anchor portion of the SME IPO of AVG Logistics, a new-age logistics player. The fund invested about Rs 9.41 crore, which accounted for 28.47 per cent of the total issue size.
Sanghvi Brands’ stock is up over 50 per cent since its November listing last year, whereas AVG Logistics is yet to get listed on the NSE Emerge platform.
Investor Kenneth Andrade’s Old Bridge Vantage Fund and HSBC Midcap Equity Fund held over 7 per cent and 4 per cent stakes in Macpower CNC Machine, an SME that claims to be India’s fastest growing CNC Manufacturing Company, as of March 31, 2018. Shares of the company have risen over 50 per cent since listing on March 22 this year
Ramesh Damani, member, BSE, and a prominent investor, picked up 99,000 shares in Vadivarhe Speciality Chemicals in June last year at Rs 90 per share. The nine-year-old company manufactures organic chemicals with a core focus on intermediates, personal care products, speciality chemicals and APIs. The stock has since climbed over 50 per cent in last one year. It could not be ascertained whether Damani still holds those shares.
Among mutual funds, HSBC Midcap Equity Fund has a substantial exposure to Worth Peripherals, an SME engaged in the manufacturing of corrugated boxes. The stock has risen more than 80 per cent since its listing in September last year. As per latest shareholding data, the fund held 3 per cent in the company as of September 2017. Shareholding data for December and March quarters was not available till April 25.
Sundaram Mutual Fund, a fund house that claims to specialise in midcaps, and DSP Black Emerging Star Fund held over 7 per cent and 4 per cent, respectively, in Jash Engineering as of March 31, 2018.
Share price of the company is down 2 per cent in last one year, but touched a high of Rs 218.10 on January 10, 2018. The company is engaged in manufacturing of water control gates, flap valves, knife gates valves and energy.
They are not everyone’s cup of tea, Lunawat warns as a caveat emptor. SME stocks are high risk-high reward bets and can be looked at only as long-term wealth creation tools. This is more of a capital formation platform, and not a traders’ market. Investors with a short-term horizon should stay away from these options. Only those with the capability to hold these stocks for the medium to long term can look at these companies, he said.