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“The valuation process primarily hinges on three key elements: the potential of the industry, the track record of the promoters, and the historical financial performance of the business,” says Kulbhushan Parashar, Founder and Managing Director at Corporate Capital Venture.

In an interview with ETMarkets, Parashar said: “We normally try to make our public offering so that there is sufficient appreciation post listing and investors get a fair deal on their investment,” Edited excerpts:

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Q) What’s been the response to two public offerings in CY-2024?

In CY-2024, we launched two public offerings on the NSE Emerge platform. Both received an excellent response due to the core strengths of being innovative and aggressive.

Delhi-based Solar PV modules manufacturer Alpex Solar received bids worth close to Rs 16,000 crore against its issue size of Rs 74 crore, thus becoming the second-highest subscribed SME IPO in history.

The second public offering, Esconet Technologies, a Delhi-based integrated B2B IT Infra solutions, received bids for Rs 9,500 crore compared to its public offering size of Rs 28 crore. Both issues began trading at listing gains of 125% and 245%, respectively, which indicates their success. Moreover, in CY-2023, Accent Microcell, an Ahmedabad-based manufacturer and exporter of pharmaceutical excipients, managed to break all records with an overwhelming response of nearly Rs 18,900 crore, making it an admirable accomplishment.

Q) How do you value different businesses – can you give us a few examples?

A) The valuation process primarily hinges on three key elements: the potential of the industry, the track record of the promoters, and the historical financial performance of the business.When determining the price-earnings ratio, we typically consider the combination of these factors. However, it’s important to allocate a portion of the valuation to investors who take on the risks associated with these high-risk investments. For instance, in one of our previous offerings Oriana Power, we valued the company at a post-issue multiple of 17 times earnings.This valuation was driven by optimistic prospects for solar energy in the country, a stellar financial history, and a team of three founders driven by ambition and growth. We normally try to make our public offering so that there is sufficient appreciation post-listing and investors get a fair deal on their investment.

Q) SME business picked up the limelight, especially in the last couple of years. What brought the change?

A) The overall Indian economy in the last 2-3 years has seen a major shift in terms of investment and spending. As a significant portion of the population entered high-income zones, correspondingly liquidity in all fundraising channels has jumped.

As we see with each IPO, whether mainboard or SME, the retail segment shows the highest demand. On the flip side, as India progresses as the fastest-growing democracy, MSMEs which account for a third of the GDP, are increasingly banking on sectors with high growth visibility. Sectors like infra, renewable energy, and manufacturing are promising for at least the next 10 years, where small companies play a critical role.

Another factor worth mentioning is that returns of small & micro cap far exceed the mid & large cap returns, which now also hold better liquidity & marketability. That’s helping Indian stock markets grow, as with more and more FII interest, now even in SMEs, we have become the world’s 4th largest in m-cap terms recently in December.

Q) Can you give us a snapshot of the kind of money SME raised in 2023 via primary markets?

The year 2023 broke all records of fundraising via this platform. Close to Rs 4,967 crore was raised across 180 issues in the calendar year. The figure is higher than the last four years combined.

Another interesting insight is that the average issue size of these IPOs is over Rs 27 crore, which has been growing all along the years. Companies across different sectors, with innovative models, are entering the capital market.

Q) What are the challenges you have faced when you are dealing with SME business owners?

Based on our experience, after interacting with thousands of SMEs, we sense a gap in majorly three spheres. Firstly, there persists a lack of awareness as to the channels of funding.

Traditionally, a typical business owner gets capital from a bank, family & friends, or his savings. The capital market is either seen as unreliable or not known altogether as a means of financing for their own small business.

Secondly, corporate governance is the one issue that usually is skipped. With growing toplines, teams and processes don’t catch up. The lack of professional advice on financial, legal, and compliance matters should also be addressed.

Lastly, promoters fear losing control and ownership of the dilution of equity in the primary markets. This stems both due to less clarity on company structures, plus a resistance to share a slice of the pie they intend to bake in the future.

Q) What is your rejection ratio? How many companies moved from SME to mainboard?

With our extensive due diligence process, we typically reject 99% of the companies. We engage with companies. Until we are satisfied with each variable contributing to a rocking SME IPO, we recommend taking some time off for corrective action against the companies or rejecting them altogether.

Q) What are your due diligence processes before you take any SME company public?

As mentioned before, our rigorous due diligence procedure ensures a comprehensive understanding of the businesses we aid in listing. It begins with multiple interactions with the promoters and team, diving deep into their business history & evolution, revenue model, operations aspects, and other functions.

Post that, our team channel checks the info gathered by skimming our network & scuttlebutts. Significant effort is dedicated to the financial and legal DD, scraping off the surface, and scrutinizing each line item before we sign an engagement letter with the client. The majority of rejections spring from identifying red flags during this examination process.

Q) What is the kind of fundraising you see for the year 2024 and beyond?

A) In the first two months, over Rs 1,200 crore has already been raised, equalling a fourth of the last year. With the current pace, CY-2024 would definitely surpass previous records. Though, with elections around the corner we could see a slowdown for a few months. But beyond the election we expect the trend to pick up again.

As we move towards a five trillion economy, we expect at least 500 companies to hit the SME Exchange garnering applications worth one lakh crore, with an average issue size almost tripling to 80-90 crore.

(Disclaimer: Recommendations, suggestions, views, and opinions given by experts are their own. These do not represent the views of the Economic Times)

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