Don’t let the excitement of an IPO (Initial Public Offering) carry you away without being careful. Figuring out if an IPO is a good investment can be tricky because there’s not a lot of information, and it’s hard to know how much a company is really worth. In this blog post, we’ll help you understand how to analyze IPOs, so you can make smart choices when deciding to invest in them.
The Context
The ultimate authority must always rest with the individual’s reason and critical analysis — Dalai Lama
The act of a firm selling its shares to the public for the first time is known as an initial public offering or IPO.
As the process goes, in exchange for cash or capital that the company may utilize for debt repayment or business expansion, the common people are offered shares that were previously held by company executives. After the IPO process is over, the business is officially declared publicly listed and its shares can be traded on open markets. The hype and advertising that surround the listing process typically force the majority of individual investors to invest in an IPO.
Social media starts to overflow with conversation and speculation about how to profit from it. Retail investors shouldn’t be seduced just by wealth stories. They too must read the cautionary indications.
For example, lack of analytical information is the main disadvantage of investing in an IPO.
People frequently lack access to sufficient information to make an informed decision about investing in an IPO. Despite being posted on SEBI’s website, the firm prospectus is difficult to interpret for many potential buyers. Another significant issue is that it might be difficult for the average investor to determine a company’s true value. This how-to guide seeks to close the knowledge gap by helping you understand some of the nuances of an unlisted company and analyze its initial public offering (IPO) for investment potential.
How To Analyze an IPO
The analysis is central to our investment philosophy and here are some simple methods for determining the worth of a company by analyzing an IPO.
Study The Company Financials
The first thing you should look at to analyze an IPO is the company’s financials. Examine the company’s performance over the last three to five years to ensure that it has been profitable. Furthermore, the company should not be heavily in debt.
The high-level details are usually available in Draft Red Herring Prospectus, also known as DHRP if you want to access this information a bit early. This document is used as proof of concept or to pique the interest of investors in a company by demonstrating the value of their investment.
More information is available in the Red Herring Prospectus (or RHP), which is usually filed a bit later with the authorities as the IPO approaches its listing date. When a business wants to obtain capital through an initial public offering (IPO), it must submit a Red Herring Prospectus (RHP) to the SEBI (Securities and Exchange Board of India).
Up to 5 years of detailed financial data are available in the RHP.
The Red Herring Prospectus is significant because it provides practically all of the fundamental facts about the firm that are necessary for investors to make an informed choice about purchasing shares in the IPO. The RHP typically gives investors all the pertinent information, beginning with the company’s business plan, operations, financials, promoters, and the company’s goal to raise money by submitting an IPO.
To obtain this document, simply Google the company name followed by DHRP NSE. You can also go directly to the NSE website to access this document. In reality, between 200 and 500 pages, or more, of jibber jabber, can be found in the DHRP and RHP.
For a hands-On experience, to read a sample RHP submitted by PayTm before their IPO, click here.
The majority of this data is maintained there to comply with regulatory authorities, but some of it is quite useful for retail investors to use as the basis for their judgments.
The most important metrics to consider are –
💬 The consistency of cash flows
💬 Corporate earnings, which should be increasing for improved prospects
💬 Company debt, which, in the best case scenario, should be minimal or nonexistent, and lastly,
💬 EPS, which also exhibits a gradual increase.
Even though a history of steady growth cannot guarantee future success for the business, it does give it an edge over less resilient competitors.
Discover The Goals Of An IPO
Read the IPO issue’s Red Herring Prospectus (RHP) while you are analyzing an IPO. When a business wants to obtain capital through an initial public offering (IPO), it must submit a Red Herring Prospectus (RHP) to the SEBI (Securities and Exchange Board of India).
The RHP also provides details on how the firm plans to use the IPO proceeds. Instead of paying down debt, the purpose of an IPO should ideally be for expansion.
Examine Market Demand
By evaluating the demand, it is simple to analyze an IPO. News on the subscription status of any IPO is released every day. It details how many investors have made IPO applications.
Another not-so-reliable way to track market demand is by following updates on the Grey Market Premium (GMP). Prior to the official listing on the exchanges, investors can trade for applications or shares on a “grey” market, which is an unofficial parallel market. In contrast to an IPO market, which is a reputable and Sebi-regulated manner of obtaining capital in the market, shares are traded in the grey market in person and for cash.
The “grey market premium,” or “GMP,” is the premium that is paid when initial public offering (IPO) shares are exchanged before they are listed on stock exchanges. Contrarily, a grey market lacks legal authorization or regulation, and any transactions that take place there are not supported or supported by stock exchanges, Sebi, or brokers.
As a result, the parties involved have no legal options in the event that the share price falls. This could occur when disinformation or manipulation techniques are used. You should steer clear of an IPO if it is undersubscribed since that means investors do not believe the company is a good option for investment.
Consider the Future-Outlook
The company’s plans are one of the most crucial aspects to consider while analyzing any IPO. This necessitates a thorough examination of the quality of the goods or services a company provides. You can accomplish this by simply contrasting costs and revenue over the preceding three years.
Future prospects for a business are often favorable if revenue increases year over year and fixed costs, such as labor costs, are stable or decreasing. You can also read the company’s recent two to three years’ worth of official news releases. Please avoid getting press release information from questionable sources, dubious websites, or social media accounts. You should make sure the business wants to grow and is on a level with its rivals in terms of its plans for new goods and services.
Conclusion
Simply because a company is in the news doesn’t make its IPO a good investment. Avoid putting your money into companies with really high valuations, as this might mean the risks outweigh the potential rewards at the current price.
Also, keep in mind that when a company goes public with an IPO, it’s a whole new ballgame for them. They might face new challenges like dealing with shareholders, keeping secrets, and preventing insider trading. Remember, just because you get an allocation in an IPO doesn’t guarantee big profits, and you might not even get the shares you applied for. We do participate in some IPOs, but our goal is usually to invest for the long term and buy more when the market is uncertain. This is the kind of thinking you should apply when looking at an IPO before putting your money into it.
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