Do detailed research
An IPO is issued when a company is being listed on the exchange for the first time. After listing, companies are required to submit their major financial data report on a quarterly basis. However, information before the company ‘goes public’ is not readily available. All relevant figures of the company are actually in the DRHP or draft red herring prospectus. Just keep in mind that such draft companies make themselves for the purpose of raising funds. This draft has not been prepared by the fair market entity.
Because of this you should do thorough research and gather as much information as possible about the company, its promoters, their criminal records (if any), financing, competitors, media coverage, and its industrial activities on a large scale. In other words, if you want a good return in an IPO, do your research as deeply as possible.
Focus on evaluation
In haste to get the allocation of shares, it has been observed that many investors do not pay much attention to the valuation of a company or its fundamental analysis. However, apart from what is given in DRHP, no other data points are available for a company to perform fundamental analysis. Companies that go public usually expect a much higher valuation from their investors. You can always test its counterparts or the general trend in the industry to get an accurate idea about it. If the company going public is the first of its kind, then competitive analysis becomes even more difficult.
Monitor QIB participation
Any company that goes public makes a special pitch for qualified institutional buyers (QIB) or qualified institutional buyers. QIBs are SEBI-registered financial institutions, banks, mutual funds and FIIs (foreign institutional investors) who usually invest money on behalf of others. QIB’s involvement in being a party to this process, along with having a dedicated network to explore a stock’s potential, is often considered a barometer of the stock’s future performance.
However, you should not rely solely on this figure as the QIB may also have its own disadvantage. For example, last year, the only stock of listed companies currently trading below its issue price has been oversubscribed nearly 10 times by QIB. If you consider such oversubscription a guarantee of return (or underperformance) in the long run, then you may find yourself at a loss later.
Read drhp well
It is mandatory for all companies to publicly state their business operations, revenue, assets, liabilities, market scenario, and also how they will use their increased capital in their red herring prospectus. Investors need to be informed about everything so that they can make informed decisions. However, many facts are hidden in DRHP as well, if you look at the details in detail and in depth, you can definitely get an important takeaway. Pay special attention to historical performance such as factors as well as how the company will use its funds. If it claims R&D or commercial expansion as its intended purpose, then it is a good sign because it is possible to develop in the future. But if the fundraising initiative is to pay off liabilities, it is better to do a more detailed analysis of the company’s balance sheet and its stake in it.
Take advantage of technology
Given the dynamism required in IPOs and in-depth analysis, it would be better to let someone work, leaving less scope for errors. Today, there are investment recommendation engines in India that benchmark results by analyzing over 1 billion data points. The good news is that they also offer IPO-focused advice. You can count on them to understand which IPO to participate in and which not to participate in.
As attractive as an IPO can be, the risk factor associated with it is also something that you should be careful about. Just keep the above factors in mind. They will ensure that IPOs are always beneficial opportunities for you, should you get any allocation.
