IPOs are fast-gaining popularity as an investment vehicle. Companies roll out their IPOs (Initial Public Offerings) in the market for a number of reasons ranging from market expansion, restructuring to settling existing liabilities or debt. When a prominent company is about to release its IPO, there’s a heady enthusiasm in the market for IPO investment.
While the company’s brand value certainly matters and plays a key role, it alone is no short-cut to fetching detailed insights about the IPO stocks and what the company intends to do with the proceeds raised. Before IPO investing, it’s essential to gain basic know-how about the company, its sector, investor history, balance sheet, assets, liability and future plans. The reason why a company is releasing an IPO often decides the performance of the stock in the long haul. You should also keep in mind your financial goals, long-term plans and orientation before investing in IPOs. Here are some of the important factors to watch before you decide to buy IPO stocks:-
It’s probably the most repeated wisdom in stock trading that there’s no alternative to a combination of market knowledge and hands-on experience. For every share that yields staggering returns, there are almost equal numbers that perform woefully. That’s why it’s crucial to pick-up the right IPO. As a thumb rule, always check out the market valuation of the company that has released the IPO stocks. Also find out if it has any existing debt or not. Often it happens that particular IPOs are kept exclusively for selected buyers via mutual funds. These IPOs would be off limits to most investors till they start trading in secondary markets. If you are looking to invest in multiple IPOs, portfolio diversification is a way to reduce risk and increase the probability of nice returns. Company valuation should always be looked at before taking a plunge in IPO investment.
Gain Vital Insights
Before zeroing on the IPO stocks that you look forward to buying, always search extensively about the company on the internet. It may seem tedious, but it’s one of the evergreen ways to gain knowledge and broaden your horizons. Information such as past performance, market standing, credibility, leadership reputation, brand value, liquidity, liability is important to make an investment decision. Though the process may seem rigorous, nothing is better than first-hand fact-finding, scrutiny and then verification. Collect as much info as you can before IPO investing.
Company’s Financial Details
There are times when we miss a lot of important details because they are not strikingly obvious, or at the centre page. In order to avoid such a situation and ensure that no vital info is amiss, it’s essential to read the draft Red Herring Prospectus (DRHP). According to SEBI guidelines, no company can issue IPO stocks if it doesn’t release the draft DRRP. The prospectus provides in-depth information about the company. It’s the most authentic way to know about the company’s growth prospects, market vision, structuring, founders, reputation etc. Financial performance gives a fair idea whether you should go ahead with the planned IPO investment or not.
Be Wary of Over-Subscription
There are only a limited number of shares that a company offers through the IPO route. The allocation to different categories of investors is also decided well in advance. Often it happens, there are more potential buyers who have applied than the number of shares released. In these cases, you may end up getting fewer IPO stocks that you applied to buy.
Look into Promoter’s Profile
Reasons, why a company is releasing an IPO, can vary from market expansion, vertical diversification to new acquisition. There are other possibilities too such as settling liabilities or restructuring. To get a clue about other obscure motives, it’s important to have a look at the profile of the company’s promoters.
Promoter’s investment trajectory may be quite revealing, as about 20% of shares of a company are held by promoters. If the promoters are lowering their stakes over a period of time, then it may indicate that they are about to withdraw from the company or would focus on some newer ventures. Just like promoters, management honchos are also given stock options. If restructuring is among the purported reasons for IPO, then what the top management is doing with their IPO stocks is also indicative of the company’s direction and future prospects.
Most eagerly awaited IPOs are usually those where the company’s intent is to funnel the investment into technology upgradation, latest innovation, workflow dynamism, quality improvement, establishing itself into a newer market, diversification, or acquiring another firm. These investments are likely to result in higher revenue, growth and market footprint. While the companies that release IPO stocks to clear pending debts, settle legal hassles, are very less likely to clock high growth.
While the offering price of the IPO depends on a number of factors including the company’s reputation, market potential, profitability, valuation etc, there are cases when prices are either under-valued or overvalued. A renowned brand releasing IPO stocks will attract a rush of buyers, thus the stock price can get inflated due to the demand-supply mismatch. The right price of a stock is usually determined by competitor analysis. This is done by price-to-sales analysis and price-to-earnings analysis, which are available in the company’s financial statement. If these ratios are higher than that of other market competitors, then the IPO smay be overpriced. Get a rough estimate on pricing before you go for IPO investing.
IPO investment may appear to be quite convoluted, but through a combination of proper research and experience, the complexity gets reduced. IPO investing is highly popular these days to gain high returns. While IPO stocks appear lucrative, there is a need for delving into details about the company’s sector, financial performance, vision, intent and the underlying reason to go public. It’s always better to do an analysis of the companies before starting IPO investment. There is no replacement for informed decisions backed by thorough insights. IPO stocks released for the purpose of tech innovation or business expansion suggest that the company is eyeing higher growth and revenue targets. Reading draft red herring prospectus before IPO investing is also highly recommended.