700% surge in just 6 months: 25 SME stocks double in 2024; sell or hold?

Analysts caution that the sharp rally in SME stocks makes them a risky proposition at current levels, and also highlight the inherent risk associated to such investments.

Stocks of small-and-medium enterprises (SME) have seen a good run at the bourses, with select counters surging over 700 per cent thus far in calendar year 2024, shows ACE Equity data. Out of the 192 SME stocks listed on the NSE, 109 stocks, or nearly 57 per cent of the counters have given a positive return during this period, data shows.

Of these 109 SME counters, 65 stocks have given a double-digit return (between 10 per cent and 99 per cent), while 25 stocks have more than doubled in price, i.e. return in excess of 100 per cent. The Nifty 50 index, on the other hand, has gained around 10 per cent during this period.

A lot of stocks in the SME segment, said G Chokkalingam, founder and head of research at Equinomics Research, could have seen a price rise in an overall buoyant market sentiment. This, he believes, makes them a risky proposition at the current levels.

“Some SME counters may have low floating stock and could see a rise on account of speculative activity. Investors need to be cautious here. For a stock commanding a price-earnings of say 50x, investors must check if the company has been delivering a consistent profit growth of around 30 per cent per annum in the previous three years to command such a high valuation. If not, investors should exit such SME stocks,” he advises.

By definition, SME companies In India, 'small and medium enterprises' (SME) is a generic term used to describe small scale industrial (SSI) units and medium-scale industrial units. According to the Indian government, any industrial unit with a total investment in its fixed assets or leased assets or hire-purchase asset up to Rs 10 million is considered as a SSI unit, and investment up to Rs 100 million is considered as a medium unit.

In addition, an SSI unit should neither be a subsidiary of any other industrial unit, nor can it be owned or controlled by any other industrial unit.

The companies in the SME sector produce a wide range of industrial products such as food products, beverage, tobacco and tobacco products, cotton textiles, wool, silk, synthetic products, jute, hemp & jute products, wood & wood products, furniture and fixtures, paper & paper products, printing publishing and allied industries.

 

Meanwhile, at the bourses, Trident Techlabs tops the chart with a surge of 771 per cent topped the SME stocks’ returns table, followed by Kck Industries (up 667 per cent), Kody Technolab, Oriana Power, Viviana Power, Solex Energy, Le Merite Exports, and Supreme Power Equipment that gained between 200 per cent and 550 per cent during this period, ACE Equity data shows.

Kranthi Bathini, Director-Equity Strategy, WealthMills Securities, for instance, said SME counters are seeing higher interest because of increased participation of high net worth investors (HNIs). That apart, the current euphoria in the equity market combined with prospects of optimistic economic growth has fueled a rally in SME stocks too.

“Strong economic growth has led to growth in SME businesses; hence we are seeing the buying interest at these counters. Having said that, investors need to be aware of the associated risks, such as lower liquidity, huge spread between buy and sell bids and fixed lot sizes in this segment. This makes an entry and exit in SME stocks difficult,” Kranthi cautioned.