In 2021, there are a lot of companies that have come up with an IPO and there are even more in the pipeline. You should consider the merits of each IPO before applying for it. Some of the points that you should consider include:
- Objects of the IPO: You should start with understanding why the company is coming out with the IPO. There can be various reasons like to repay debt, expansion of business, make acquisitions, finance business working capital requirements, meet general corporate purposes, achieve the benefits of listing equity shares on the stock exchanges, existing shareholders wanting to offload some/all of their stake, etc.
- Financials of the company: You should look at the past financial track record of the company. You should check whether the company has been consistently growing its revenues and profits, the margins it is earning and if there is scope to increase them, the debt levels of the company and whether they are sustainable, whether the company is consistently paying dividends etc.
- Promoters and management: You should check the track record of promoters, their shareholding on whether it is consistent or it is increasing or decreasing. Promoters increasing their stake from time to time is a sign of confidence in the future performance of the company and promoters regularly selling shares and reducing their stake could be a red flag. Evaluate the performance of the management in terms of whether their past decisions have impacted the company’s performance positively or negatively. There should have been no corporate governance issues with the management and promoters.
- Valuations comparison with peers: Based on the IPO pricing of shares, compare the valuation of the company with its peers. You can read research reports published by brokerage firms. They use metrics like price-earnings (PE) ratio, price to book (PB) ratio, and others for comparing the company with its peers.
- SWOT analysis: Do a SWOT (Strengths, Weakness, Opportunities, and Threats) analysis of the company. Check the strengths of the company and see how the company is further building on them. Identify the weakness and check what plans the company has to overcome them. What are the opportunities for the company and how it is planning to capitalise on them. What are the threats that the company faces and how it is planning to ward them off.
Red Herring Prospectus (RHP)
You can get most of the above information on objects of the IPO, financials of the company, information about promoters and management, etc. from the company’s Red Herring Prospectus (RHP), also known as offer document. Before launching an IPO, the company needs to get approval from the Securities and Exchange Board of India (SEBI). The company prepares and files the Draft Red Herring Prospectus (DRHP) with SEBI for getting the IPO approval. The RHP has all the detailed information about the company. Once you read the RHP, you will have a pretty clear idea on whether you should apply in the IPO. You can access the RHP from the company’s website, the website of the merchant banker to the issue, SEBI website, the websites of NSE or BSE.