The year 2021 could be referred to as the year of initial public offerings (IPOs) (IPOs). Due to market exuberance, high liquidity, and increasing retail participation, IPO activity in India grew 156 percent and 314 percent year over year in terms of deal numbers and proceeds, respectively. In terms of proceeds, 2021 was India’s finest IPO year in the recent 20 years. In 2021, the markets were fueled by ample global liquidity, excellent earnings, and rising retail engagement.
An IPO, or initial public offering, occurs when a firm first offers its stock to the public and puts it on a stock exchange for trading. It is a method of raising donations from the general population. While there was a flurry of initial public offerings (IPOs) in 2021, With a flurry of startups expected in the next years, investors must avoid getting caught up in the hype. The investor must differentiate between listing gains and a company’s long-term prospects.
- Reason for going Public
The reason for a company’s IPO is one of the very few things to investigate. Is it for expansion, capital expenditure, loan repayments, or simply because it lacks the funds to meet its day-to-day obligations? If the latter is the case, investing in the IPO may not be a good idea. The Draft, Red Herring Prospectus, which is a biodata of the firm that comprises all the information such as the operational area, revenue, and structure, covers all the facts on why a company is going public.
2. Company Financials
The next question to ask would be whether the company has generated respectable returns in recent years. Investigate the company’s revenues, profitability, and cash flows to have a deeper understanding of its financial health. It may be a favorable sign if the company’s revenues and earnings are consistent and on the rise. You must be cautious if they appear to be conflicting. Pay special attention to the risk factors listed in the DRHP of the company. When it comes to IPO investing, these act as filters that can make or break the deal. Legal battles, natural disasters, and policy-related changes in interest rates are all potential risk factors that could stifle the company’s development potential.
3. Company Valuation
The present or expected value of a firm is influenced by its profitability, growth potential, industry outlook, and other variables. You should think about a company’s valuation before investing in its initial public offering (IPO). You can do a fair comparison with its publicly traded peers to assess if the IPO price is warranted. A company’s valuation might be reasonable, undervalued, or overvalued. There is a possibility that your investment will pay off in the first two scenarios. If a firm is overvalued, its stock price is prone to falling once it goes public.
You can understand more about Valuation here.
4. Growth Prospects in the industry
Once you’ve gone through the fundamentals of a firm, such as its purpose for raising cash, financials, and valuation, you might want to look at the industry and its growth prospects. You’re making a long-term investment in a company’s future. If it has the potential to develop, either organically or inorganically, your investment’s prospects of expanding will improve as well. Take a look at how it compares to its competitors in the business. To assess a company’s potential growth, look at its competition and unique selling proposition.
5. The subscription angle
Another important measure to consider is the issue’s subscription rate. The market does not have enough faith in a company if it is undersubscribed. As a result, staying away might be a good idea. On the other hand, if there is good demand, it may be worth investing in the IPO. However, this cannot be the sole deciding factor. The grey market could also be used to keep track of IPO subscribers. It depicts the likelihood of an IPO among investors and forecasts over and under subscription.
6. Management Details
Finally, you must be conscious of those in charge of the company’s performance. The direction in which a corporation moves can be governed by its management. You may be confident that the company is on the right track with strong leadership. The people in charge of a company’s show should be thoroughly investigated. The promoters and other senior executives of the company make up this group. The capacity of these individuals to make effective business judgments has a substantial impact on the firm’s development prospects because they are the company’s driving force. An investor should take note of how long top management officials have been with the company.
It’s a wrap
Investing in an initial public offering (IPO) might be intimidating, especially if it’s your first time. This is why understanding how to analyze is so important. IPOs can be a great way to cash in on a company’s growth, and for investors, it reaps profits substantially if the company does well. In addition, you will get capital appreciation by selling the stock when it reaches a higher market price after listing.
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