SME IPO Success Factors

Issuing an IPO for SMEs marks a significant milestone and transition for a company's founders and promoters, ushering in a new phase of growth with a plethora of opportunities. An IPO process is lengthy and complex. It requires a lot of planning and coordination between many stakeholders and intermediaries.

It is the dream of every SME company to launch a successful IPO. However, not all IPOs are successful. Various factors affect the success of an IPO. Some factors can be controlled and some cannot. Thus, it is important to know the factors that influence the success rate of an IPO.

In this chapter, we will explore these elements in detail. This can help promoters formulate their SME IPO strategy in such a way that it increases the chances of their IPO success rate.

IPO Success Factors

The success of the IPO depends on various factors. Some of them are explained below:

1. SME company readiness

The company readiness is the first and foremost criteria to determine IPO success. The readiness of a company includes analysing its financial health, stability, and scalability. The finances should be in order, and internal processes should be strong enough to withstand the increased scrutiny associated with a public company.

The initial eligibility for SME IPO can be assessed as per the requirements laid down by stock exchanges/SEBI. However, it is also important to ensure scalability post-IPO to meet the increased demand viz. higher transaction volumes, enhanced supply chain management etc. These steps are critical to meeting public market expectations and achieving sustainable growth.

2. Market conditions for IPO

Timing is one of the crucial elements for an IPO launch. Thus, it is very important to evaluate the current market conditions and investor sentiments before launching an IPO. If the markets are very volatile and fluctuating with economic downturns, it is better to wait or hold the IPO launch.

3. Thorough Research

The issuer company should conduct comprehensive market research to understand the prevailing trends, investors' expectations, product demand, competitors' position in the industry, industry overview, etc. to know whether the company can withstand all these insights and manage the IPO and post-IPO period.

4. Strong Management Team

A strong management team is very important for the success of an IPO. Investors generally look at the management's industry experience, qualifications and expertise and evaluate the company's future performance.

A good management team is said to have a forward-looking vision and can effectively overcome challenges. Therefore, it is important for the company to build a qualified management team with experience in the relevant areas, train employees thoroughly to comply with regulations and reporting standards, and adapt HR policies to the needs of a listed company.

The profile of the managing directors, directors and independent directors is also of great importance.

5. Strong company fundamentals

A company with solid financial and fundamental data is always viewed favourably compared to a company with weaker financial data. Investors are interested in the company's profitability ratios and revenue streams.

6. Unique business model

The business model of a company also determines the extent of the success of an IPO. A company with a strong and unique business model has appropriate and strategic operating plans, revenue generation plans, a well-defined target market and sustainable growth plans. Such companies have high growth potential and good prospects.

The unique business model and first mover advantage (the first company in a particular segment to go public) significantly increase the demand for IPO shares.

7. Company Valuation

Deriving the correct company valuation is very important. An overvaluation can lead to investors jumping ship for fear of losses, while an undervaluation can raise doubts among investors. A balanced valuation, in turn, helps to determine the right price for the issue.

Ideally, the calculation of the company valuation is a complex process and requires in-depth knowledge of financial concepts. IPO consultants, Certified Business Valuers and Merchant Bankers support the issuing company in the IPO valuation process.

SME companies can use the Issue Size calculator, DCF calculator, and PE Multiple calculator to self-assess the approximate valuations of their company as a basic step. Refer to IPO valuation for more details.

8. Effective Pricing

Effective pricing is important to ensure that the company raises the desired capital and appeals to a broad investor base. The price is set based on various factors such as the valuation and pricing of other companies, demand, company valuation, etc. It is very important to set a fair price that can increase investor confidence in the company.

9. Merchant banker selection

A good SME merchant banker is the key to the success of an IPO. They orchestrate the entire IPO process, including eligibility check, valuation, documentation, filing and regulatory approval, hiring intermediaries, fund raising, and listing of shares.

The success of the IPO is highly dependent on the merchant banker's experience, expertise, networking capabilities, analytical skills, knowledge (financial, regulatory, market) and performance. Therefore, it is important to select a suitable and experienced merchant banker for an effective IPO process. Find out about the best merchant bankers for SME IPOs based on their performance.

Our IPO advisory services can help you find the most suitable lead manager for your IPO.

10. Government Policy and Regulatory Changes

Any change in government policy or regulatory changes can impact the IPO. Sometimes a certain change in the government policy may impact a particular industry that may in turn impact the IPO launch of that particular sector. The regulatory changes viz. introduction of stringent laws or relaxation of rules can also affect the IPO. It is important that the issuer company is aware of all the changes and implement them proactively.

11. Company branding and Investor relations (IR)

Develop a strong brand identity aligned with core values and market position, and create a compelling message for investors and market trends in India. A reputed name many times plays a major role in the success of an IPO.

12. Appointment of good intermediaries

A successful IPO depends on working with professionals who specialise in critical areas like legal, marketing and audit.

• Legal advisers are crucial for clarifying complex legal and regulatory issues, preparing the offer document, and ensuring compliance.
• Auditors conduct thorough audits to ensure that financial statements meet legal requirements.
• Public relations and marketing professionals play a key role in shaping the company's image and promoting a positive perception among investors.

Together, these professionals provide a comprehensive approach to executing a successful IPO.

13. Cultural and Organizational Transition

Prepare the organization culturally by promoting transparency, accountability, and sound leadership practices while maintaining employee morale and engagement throughout the IPO process and ensuring alignment with the organization's evolving structure and goals.

These efforts foster organisational unity and a willingness to embrace the demands of a publicly traded company, supporting long-term growth and stability.

14. Roadshows and Marketing

A company's market position and branding contribute significantly to the success of its IPO by attracting investor interest and leading to a higher valuation. Therefore, it is crucial to build a positive brand image that attracts investors.

Organize roadshows and presentations to introduce the company's value proposition to potential investors. Use media and PR (public relations) campaigns to attract attention and generate interest in the IPO. Develop strategies to engage retail investors, such as advertising campaigns and online outreach.

Over 30 lakh IPO investors visit the websites Chittorgarh.com and InvestorGain.com. Advertise your IPO with us to reach these potential investors.

15. Anchor Investors in SME IPO

An SME IPO with good anchor investors also helps to strengthen investor confidence.

When SME IPOs have reputable anchor investors, this creates confidence among small investors. The anchor investors therefore also play an indirect role in the success of an IPO. Check the list of anchor investors for SME IPOs against the IPO performance in terms of subscription and listing profits.

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IPO Success Stories (Case Studies)

Here are some examples of the most successful SME IPOs in India:

1. HOAC Foods India Limited SME IPO

HOAC Foods India Limited, a fast-growing company in the food and beverage sector, launched its IPO in May 2024. The company is known for its innovative, high-quality food products that cater to the diverse tastes of consumers.

Key IPO success factors

• Strong brand and product line: HOAC Foods differentiates itself in the competitive market through its strong brand presence and its innovative, quality, and health-oriented food products.
• Sustainable business model: The company's business model has built a loyal customer base through its stores and mobile app. The company sources the raw materials directly and delivers them within a day to ensure their freshness. These sustainable practices preserve the authentic taste by eliminating preservatives. The installation of flour mills in the stores and the offering of health-conscious products have increased sales and improved profit margins.
• Growth potential: Healthy and convenient foods are in great demand. HOAC Foods has expanded its market presence and diversified its product portfolio in the thriving Indian food and beverage sector to meet the increasing demand.
• Financial performance: The company's steady sales growth, profitability, and solid financial position have boosted investor confidence and increased the company's attractiveness.
• Market positioning: HOAC Foods has established itself as a leader in the health and wellness segment of the food industry, improving market penetration and brand awareness through strategic marketing and distribution networks.

IPO details

The company aimed to raise Rs 5.54 Cr with the shares being offered at a fixed price of Rs 48 per share.

The book-building process met with great interest from all investor categories.

• Overall subscription: 2,013.64 times.
• Retail subscription: 2,556.46 times
• Other category subscription: 1,432.60 times

Outcome

• Listing day stock performance: Debuted at a price of Rs 206.80, a premium over the original fixed price, indicating strong investor demand and positive market sentiment.
• Post-IPO performance: post-IPO, the stock continued its strong performance in the secondary market, supported by the company's robust growth trajectory and market presence.

The successful IPO of HOAC Foods India Limited has demonstrated that the company's strong brand positioning, solid financial performance, and growth potential have attracted investor interest and enabled the company to raise capital, expand operations, and strengthen its market leadership in the food and beverage sector.

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2. Medicamen Organics Limited SME IPO

Medicamen Organics Limited, a pharmaceutical company specializing in the manufacture of active pharmaceutical ingredients (APIs) and intermediates, launched its SME IPO in June 2024. The company's objective was to capitalize on the growing pharmaceutical industry in India and expand its market presence.

Key IPO success factors

• Specialized Product Portfolio: Medicamen Organics specializes in the manufacture of active pharmaceutical ingredients (APIs) supplying both the domestic and global markets. With its specialized product range and strict quality standards, the company has established itself as a reliable supplier to the industry.
• Experienced Promoter and Management Team: Medicamen Organics' experienced management team drives the company's growth and oversees strategic and day-to-day activities. Their vision and expertise are key to the company's success. The company values their employees and maintains its competitive edge to ensure high customer satisfaction.
• Industry Growth: Medicamen Organics benefited from the robust growth of the Indian pharmaceutical sector due to rising healthcare spending, chronic diseases, and the expansion of healthcare infrastructure, which improved the company's growth prospects and attracted investor interest.
• Strong Market Position: The company's strong market presence among pharmaceutical companies, backed by its reputation for quality and reliability in the manufacture of active ingredients, has improved customer loyalty and competitiveness in the market.
• Financial Performance: Medicamen Organics' consistent revenue growth and profitability and its solid financial position and positive cash flow attracted many investors.

IPO Details

The aim of the SME IPO was to raise Rs 10.54 Cr. to expand operations, increase production capacity and cover working capital requirements by offering shares in a price range of Rs 32 to Rs 34 per share.

The IPO met with strong demand from institutional and retail investors during the bookbuilding process.

• Overall subscription: 56 times.
• Retail subscription: 1309.77 times
• NII subscription: 1343.83 times
• QIB subscription: 173.03 times

Outcome

• Listing day stock performance: Traded at a price of Rs 119, representing a 71.42% premium to the upper range of the issue price, reflecting strong market demand and investor optimism.
• Post-IPO performance: The stock continued to perform well in the secondary market, reflecting the company's expansion initiatives and favourable industry dynamics.

The successful IPO of Medicamen Organics Limited has demonstrated the importance of specialized expertise, strong market positioning, and solid financial performance in attracting investor interest. With a focus on API manufacturing and a strategic approach to growth, the company has positioned itself for future expansion and market leadership, demonstrating that SMEs in niche sectors have the potential to gain significant market recognition and increase value for investors.

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3. Kay Cee Energy & Infra Limited SME IPO

Kay Cee Energy & Infra Limited, a company specializing in the development of renewable energy infrastructure and projects, launched its SME IPO in December 2023. The company aims to capitalize on the growing demand for sustainable energy solutions and infrastructure development in India.

Key IPO success factors

• Sector focus: Kay Cee Energy & Infra is active in the renewable energy and infrastructure sectors in India and benefits from the government's focus on these areas, which supports its growth potential.
• Strong project pipeline: The company has a strong project pipeline in the renewable energy sector, such as solar and wind energy, as well as infrastructure projects such as roads, bridges and other large infrastructure projects.
• Strong execution capabilities with industry experience: The company has a strong project management team, in-house design and engineering team, modern machinery, and skilled workforce that allows the company to deliver world-class work that meets all project standards and timelines, ensuring profitability and competitiveness.
• Financial performance: Kay Cee Energy & Infra has a steady sales growth and profitability coupled with a healthy balance sheet and manageable debt.
• Experienced management team: The company's experienced management team have established the company's strong market position and ensured a high level of customer satisfaction.

IPO Details:

The SME IPO aimed to raise Rs 15.93 Cr for project development, debt repayment, and general corporate purposes, with the shares being offered at a price range of Rs 51 to Rs 54 per share.

The IPO met with great interest from retail, non-institutional and institutional investors.

• Overall subscription: 45 times
• RII subscription: 10 times
• NII subscription: 97 times
• QIB subscription: 71 times

Outcome

• Listing day stock performance: Kay Cee Energy & Infra shares listed at Rs 376, a premium of 85.63% over the issue price, indicating strong market demand and investor enthusiasm.
• Post-IPO performance: The stock continued to perform well on the secondary market, supported by the company's ongoing project developments and favourable industry trends.

The successful IPO of Kay Cee Energy & Infra Limited shows how important it is to be active in high-growth sectors and to have financial strength and competent management. Investors responded positively to the company's focus on renewable energy and infrastructure, enabling it to secure funding for its growth and strengthen its market position. This illustrates the potential of SMEs to attract investor interest and deliver strong market performance in specialized sectors.

Key Takeaways

• The success of SME IPOs depends on a strategic approach, a strong project pipeline, an industry focus, and experienced management. Niche markets and growth opportunities play a decisive role.
• A company can enhance the chances of a successful IPO by selecting a good lead manager, launching an IPO at the right time, preparing well for an IPO, strategic planning coupled with a strong and experienced management team and proper marketing.
• An IPO success can get impacted by market sentiments, market conditions, government policies or regulatory changes. These factors are not in the control of the company. Hence, a company should be able to do such crisis management.
• Favourable market conditions, a stable economy, and positive investor sentiment are critical to the success of an IPO. Timing is critical, especially for SMEs in volatile markets.
• IPO success rate in India varies by sector, with industries such as technology, pharmaceuticals, and renewable energy having higher success rates. SME IPO results depend on market conditions, valuation, and company fundamentals.