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As the economy grows, more companies will raise funds for expansion plans. The two ways are the PE/VC route, where the money is raised through private players and VC firms, in which the capital raised is through debt or equity or a mix of both. The other way, and usually the latter stage, is when the VC/PE investors get their exit through a successful listing on the stock exchange, also known as the IPO.
Investing as a beginner investor bears a lot of heavy risk, and the ticket size for entry is something few can afford. Hence, IPOs become a better source of investment for many. How does one prepare for upcoming IPOs? What do they look for in a company? What are the aspects that they can avoid? & some best practices. Let’s dive into this blog.
The Dos for Upcoming IPOs:
1. Conduct research
Understanding the business of the company, the financial statements and the potential risk are the basics of investing money anywhere, be it an upcoming IPO or a listed company.
Research done by experts may have some personal bias that may not be in your interest. Invest time in comparing the competitors of the upcoming IPO company to get the sectoral benchmark and then make your final call.
2. Read the prospectus
The best place to know more about the upcoming IPO company is to read their Red Herring Prospectus (RHP). It is a publicly available document filed with the SEBI. It contains almost everything you need to know about the company.
For upcoming IPOs, another thing to look out for is knowing where the funds will be utilized. This gives an idea about the company’s direction and helps you decide better.
3. Examine promoter’s backgrounds
In a usual case, promoters are known as the company’s spine. If their stakes have a minor exit or as is, the factor of doubt is limited to none. However, if the promoters are making an exit, it may indicate a sale in distress. The best choice may be to avoid such an upcoming IPOs.
4. Invest at a cut-off price
Raising your allotment chances of success in an upcoming IPOs is difficult. One way you can go about this is to invest at the upper limit of the price band.
5. Be skeptical about valuations
Upcoming IPOs, once listed, do not perform well over a long period if their valuations are overstated. Key metrics that can help you understand this are:
- P/E Ratio (Price to Earnings Ratio)
- P/B Ratio (Price to Book Ratio)
- P/S Ratio (Price to Sales Ratio)
Comparing these with the industry ratio will give you an idea of how fairly the company is valued.
Some of the Don’ts for Upcoming IPOs:
1. Selective Investment
Don’t invest in every IPO. Assess each one based on its merits and your investment strategy.
2. Independent Research
Avoid relying solely on influencers or market ‘tips’. Conduct your own research to make informed decisions.
3. Single Application
Applying for an IPO through multiple Demat accounts linked to the same PAN can lead to application rejection due to duplicity.
4. Avoid Hype
Stay clear of IPOs that are hyped without strong fundamentals or clear growth prospects.
5. Check Lock-in Periods
Be wary of IPOs where promoters or major investors are selling a significant portion of their holdings immediately after the lock-in period.
6. Regulatory Compliance
Ensure the company has a clean regulatory record and complies with SEBI guidelines.
In essence, the decision to invest in IPOs should be guided by thorough research rather than the allure of every new offering. Careful analysis and discernment are essential in identifying IPOs that truly offer potential for growth and align with your investment strategy. Choose wisely to optimize your investment outcomes.
