The SME IPO Handbook · Chapter 7 of 12
SME IPO Pricing and Valuation
Smaller companies, higher swings
SME issues are often priced at a high P/E relative to earnings because growth is expected from a small base. Ask how many years the growth rate must continue to justify the price.
A worked example
Issue price ₹120, post-issue shares 1.5 crore, last year's profit ₹4 crore. Market capitalisation is ₹180 crore and the P/E is 45. For that to normalise to 20 in four years, profit would have to roughly double and then some. Ask whether the business plan supports that.
Compare carefully
Peers listed on the mainboard are usually much larger; compare margins, return on capital and growth, not just the P/E.
Price band
SME bands are often narrow or fixed. The upper end of the band is the figure to use for valuation.
Key takeaways
- High P/E needs high sustained growth.
- Compare margins and returns, not just P/E.
- Use the upper band for valuation.
- Test whether the business plan can justify the multiple.