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The recent frenzied 400x over-subscription of the SME IPO for Resourceful Automobile has ignited a debate about the interplay between market fundamentals and liquidity. While investors are captivated by the promise of quick returns in the BSE's SME index, industry experts like Nilesh Shah, Managing Director of Kotak Mahindra Asset Management, express concerns about the disconnect between current valuations and underlying fundamentals.
Shah, drawing parallels to the stock market boom of the 1990s, warns that the current surge driven by abundant liquidity may not be sustainable. He argues that the 'power of money' can temporarily inflate valuations, but ultimately, fundamentals will prevail once the tide of liquidity subsides. He cites the example of the OTC Exchange of India, which collapsed despite initial success in facilitating capital access for small and medium enterprises.
Despite the robust performance of the BSE SME IPO index, achieving a CAGR return of 66 percent over the past 10 years, Shah remains skeptical. He believes that while some SME IPOs may perform well, the majority, at their current valuations, are unlikely to meet investor expectations. He points to the stark disparity between the performance of the SME IPO index and the underlying fundamentals of many listed companies, exemplified by Resourceful Automobile's extraordinary over-subscription despite its limited operations and modest workforce.
Deepak Shenoy, founder of Capital Mind, takes a contrarian stance, highlighting the potential risks associated with the current SME IPO frenzy. This ongoing debate underscores the inherent uncertainty and potential volatility in the market, particularly when liquidity drives valuations beyond the realm of traditional fundamental analysis. While the lure of quick returns may attract investors, it is crucial to exercise caution and evaluate investment decisions based on a comprehensive understanding of the underlying fundamentals.
Source: SME IPO frenzy disconnected with fundamentals and reflects the 'power of money', says Nilesh Shah