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How to Analyse an IPO?

We all know that the season of IPO is going on with many companies coming up with IPO's and many more to come. This has created a lot of buzz and left many people confused as to such which IPO to apply for and which to leave. In this article, I have tried to come up with pointers to look out for when you want to analyse an IPO.

7 Steps to analyse an IPO

7 Steps to Analyse an IPO

Step 1: Understand the Business Model

The first step would be to get to know about the business model of the company. For this, you can take the help of the company's Red herring prospectus (RHP). You can find company's RHP at website of SEBI or National Stock Exchange. On SEBI's website you can go to Filing > Public Issue > RHP Filed > Select Company. On NSE's website you can go to Product > IPO > Current market report > Book building > choose company and find RHP from list. In the company's RHP you should go to ‘Our business' column.

To understand the business model you should find about the following points:

  • Different products of the company and their revenue share
  • Strengths and weaknesses of the company
  • Sales segmentation
  • Manufacturing units and their capacity utilization
  • Future plans of the company

Step 2: Economy Analysis

Another important step is to analyse the general economy. For global economy analysis, you can take the help of website of International Monetary Fund and World Bank. You can check the Global Economic prospects there. For Indian economy analysis, you can take the help of website of Department of Economic Affairs.

Step 3: Industry Analysis

Even though the general economy might be in a good condition but if the industry is not performing good then that company might not be a good option. Try to compare the CAGR of the industry which is mentioned in the prospectus also. You can also go to IBEF.ORG > Industry tab where you can get to know about statistics of various industries.

Step 4: Company Analysis

You need to check the following data of the company:

  • Topline growth (revenue)
  • Bottom line growth (profit)
  • Debt-equity ratio (upto 2 is good)
  • Cashflow from core operations

Generally the past 3 years data of the company is given in red herring prospectus


Step 5: Valuation

The valuation of the company is very important in an IPO. If the valuation of the company is very high, then the chances of listing gains are less. You need to compare the valuation of the company by comparing with that of its competitors. Also keep an eye in the grey market premium of the IPO.

Step 6: Risk factors and Litigations

The measurement of risk before investing in a company is really important if you are looking for a long term investment. For example- If a company's top 10 customers hold for 70% of the revenue of the company then it is a risky situation because if any of those 10 customers will stop buying from that company then the revenue would be hardly hit. Moreover, a pending litigation against a company can be a risky situation for the entity's existence.

Step 7: IPO details

Check out for the IPO details. Look out whether the company's IPO is fresh issue or a offer for sale. If the offer for sale component is large then it might not be a good choice. The issue size is also important because if the size is small then your chances of getting allotment is also less. Read about the purpose of this IPO, how the funds will be utilized.

So next time when you get interested in applying for an IPO, look out for these seven pointers.

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