How to Analyse IPOs?

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We frequently come across the news of upcoming IPOs of companies. IPOs are very lucrative for the investors as they help to earn huge gains by investing in companies having significant future growth potential. However, there are also certain risks associated with them, which makes it important to analyse as to which IPO is worth investing.


Here is how an IPO can be analysed and investment decision can be made:

1.  Find DRHP/RHP of the Company:

Draft Red Herring Prospectus/ Red herring Prospectus basically lists out all required information about the company. This document can be downloaded directly from the website of SEBI or from the website of the stock market in which the company is being listed.

2.  Understand the Business Model of the Company:

a)  Products/services and their revenue contribution- It is important to take an understanding of the products or services offered by the company and their contribution.

b)  Strengths- Gather knowledge about the unique feature of the company that provides it an advantage over its competitors.

c)  Manufacturing units and their capacity utilization- Find details about the manufacturing units and their capacity utilization. It provides insights on how efficiently the company is allocating its funds and the future scope of expansion.

d)  Domestic sales and exports- Check out the existing and expected revenue from operations of the company and the contribution of exports in that revenue.

e)  Strategies and future plans of management- Ultimately it is the management strategy that is going to lead the company to its vision. Hence a strong strategy is required by the company to withstand the competition and lead in the market.

3.  Financial Analysis and Valuation of Company

In order to understand the company’s financial position, it is important to analyse its financial statements: Statement of Profit and Loss, Balance Sheet and Cash Flow Statement.

The fair value of the company’s shares can be calculated using the company’s P/E ratio, Comparable Transaction Multiple (CTM) or other relevant parameters. In addition, Grey Market Premium (GPM) can be used to know the chances of listing gains.

4.  Risk Factors and Pending Litigations

Any pending litigations on the promoter or risk pertaining to the company might cause a loss in confidence among investors in future. Hence, it is important to consider these while making investment decision.

5.  Industry Analysis

Overall industry performance affects the performance of firms belonging to that industry. If the industry growth rate is high, then firm’s growth rate is also expected to be high and vice versa. Hence, check the CAGR of the industry in which the company is operating. www.ibef.org is one such site that can be used for conducting industry analysis.

6.  Analysis of the Overall Economy

In order to gain confidence on the promising prospectus it is essential to analyse the overall economy. This should be done at both country level and global level (if the company has international operations) using data provided on websites of Department of Economic Affairs of India, IMF and World Bank.

7.  Other Details

See if the IPO is an Offer for Sale (OFS) or fresh issue or both. Also, analyse the plan of the company regarding the allocation of proceeds received.

These are some of the important points to be considered while investing in an IPO. Hope you enjoy analysing the upcoming IPOs of Glenmark Lifescience, Paytm, PolicyBazaar and many more!

Sources:

  1.  https://www.investopedia.com/terms/i/ipo.asp
  2.  https://www.sebi.gov.in/
  3.  https://www.chittorgarh.com/

 

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