Demystifying IPOs – Part 2

In the recent times, investors have been flocking to the IPO market like never before. Companies, which had earlier shied away from the capital market, are now returning to the markets.The reason for this enthusiasm can be attributed to the digital boom that markets have witnessed over the past few years.

But should one just jump for an IPO as soon as it is announced?

Here an attempt has been made to outline some points that investors should look at before they pick an IPO to invest in:

What Are The Major Risk Factors?

Reading the risk factors is the most vital part to ascertain if there are any major concerns or risk associated with the company. Many times there are certain litigations and liabilities that can be a threat to the company’s future business prospects.

Who are the Lead Managers to the issue and do they indicate the quality of the issue?

The Lead Managers act as a catalyst and bring in some credibility and their accountability is also very high. However, the lead managers’ credibility does not assure success.

What are the objectives of the issue and shareholding pattern after the IPO?

Check the promoter shareholding before and after the IPO. The higher the shareholding of promoters the better for minority shareholders. It is also important to know if the funds are being raised for the company or the promoters are selling their stake. Then, check whether the portion of fund mobilized is being invested in land, buildings, new projector if the company is utilizing a portion of issue proceeds towards retiring high-cost debts. Further, the anchor book and which institutions have subscribed also provides the appetite from the buy side investors.

What is the growth prospect of the sector company operates in?

Each sector has its own internal and external factors that influence the operation of the company. Look out for the competition and company’s market share compared to its peers.

Does the company enjoy tax benefits?

Lower incidence of tax benefits companies as their cash flows are increased to that extent.

Do the promoters have enough experience?

Who is running the show is important. Promoters and top management are the biggest assets of any company. Hence reading the background and experience of promoters and top management is very important.

Will the money invested give good returns?

Reading or glancing through the financials is a must. Check if there is any major spike in the numbers of last few quarters or last one year just before the IPO. One can look at the comparative valuations to check if the company’s valuations are in line with its peers or if there is a big deviation.

Is the IPO price of the issue reasonable enough?

To justify pricing, compare the IPO with the current companies in the sector that are listed using: the price to earnings ratio, operating margins, market capitalization.

The final word:

Make sure you invest your hard-earned money after a due diligence or you can consult a professional advisor to help you make the right call.

References:

Pankaj Tibrewal's checklist for investing in an IPO

What to look for before investing in IPOs