Let us begin with some quick stats as procured from online sources (sources mentioned at the end of the blog). In the first year of the global pandemic, over 12 crore new investors were added to the investment market in India. Over 43 IPOs were launched in the same year, 2020, with some of them being oversubscribed by 100 – 150 times, raising a total of over $4 billion. This incredible trend is expected to continue in 2021. With so many diverse IPOs exploding in the market, it is natural to get overwhelmed whilst deciding whether that particular IPO is best suited for your specific investment goals. Let us explore some of the key parameters in understanding how to evaluate an IPO en route making a knowledgeable and profitable investment decision.

What is an IPO

IPOs (Initial Public Offerings) are stocks which are newly issued. Since they are new, which means they have not been traded on the stock exchange previously implies that the firms or companies which have these IPOs have not been as heavily scrutinized or analyzed as the regular stocks for which all information is easily available across multiple forums. There is no historical performance data (like Annual Reports, Market Analysts’ Reports etc.) available which is usually used for predicting current stability and future growth. To some, this might be a great opportunity to buy stocks at low prices, to some others it might be a risky proposition. Regardless, let us now examine some of the key parameters to be considered before making your decision.

Evaluation Parameters

How to evaluate an IPO? This is a commonly occurring question in the minds of several investors. As mentioned above, due to the lack of prevalent information and track record it can be a daunting task. Some of the important factors to take into account are:

Company Prospectus:

Most companies make their prospectus publicly available before the launch of their IPOs. This, typically, includes information regarding their line of business (LoB), current operations, future direct etc. It is also, commonly, referred to as a Red Herring Prospectus. Due to the lack of existing company annual reports, this prospectus can be a good source of information for prospective investors to carefully comb through the business model and anticipated strategies of the company. Ideally, this should be backed up with online or offline research regarding news, developments, management structure of the company. It is important to remember that a prospectus is unlikely to contain any negative information that might be pertinent to your investment decision. So self research is of great value.

Management Team:

In continuation to the above discussed point, while historical performance of the company’s operations may not be so readily available, one can always research the track record of the management team. This is important to gauge whether it is able and capable enough to steer the helm of the company you intend to invest in. Reading up about their achievements can also help you give an insight on the direction they are expected to take.

Magnitude of Issue Size and Price:

Subsequent to releasing a prospectus, the company is expected to announce the details pertaining to the size of issue and corresponding price band. A price band is the range between the expected ceiling (maximum) and floor (minimum) prices within which the sale of the share will be expected to be conducted.

Business Associated Risks:

It is considered prudent to make yourself well aware of the risks associated in the line of the business the company indulges in. Whether there are pending legal lawsuits, any actions by regulatory authorities or other risks related to the area of operations; this information can help you decide to go ahead or steer clear of the IPO.

 

In Summation

Of course this is not an entire list. The more you conduct your research and due diligence there will crop up more aspects which are worth paying attention to. Essentially, the old adage needs to be heeded “buyer beware”. All considerations need to be taken into account. More so, due to the lack of detailed performance related information or historical data to base your decision upon.

Each IPO is launched with a certain panache and fanfare. This does not automatically make it a winner. The investor needs to be careful to not get swayed by marketing tactics and stay focussed on verifiable facts. Another mistake to be avoided, as per most experts, is to refrain from investing with the primary intent of deriving listing gains. While the IPO might be the talk of the town at the moment and over subscribed multiple times over, it does not necessarily guarantee proportional gains the moment it is listed. This has happened enough times in the past to make it an important experiential learning. Thus, it is advisable to keep a reasonable horizon in mind to earn safer returns.

With this article, we hope we have been able to provide sufficient information and insights to the reader on how to evaluate an IPO, before deciding whether to invest or not.