This year, there is a lot of buzz being created in the primary market. Every other week we are coming across a flurry of reports about the new initial public offerings (IPOs). An increasing number of new investors, with the millennials from Tier 2+ cities showing interest in the market like never before, coupled with a gush of liquidity has been an encouraging sign for a lot of companies to go public. I have mentioned it time and again that the millennials have turned out to be the smartest breed of investors, with a lot of them entering the markets with IPOs. However, there are a few things one should check before making an investment in an IPO.
When investing, you need to be clear about your goal—are you looking at listing gains or a long-term investment? Let's take the example of SBI Card that created a huge buzz this year. It was listed at somewhere around Rs 658 while the issue price was around Rs 755. Now, this is definitely changing for the better if you are ready to hold your investment. And this is what you need to identify before you invest whether you can afford to stay long-term or will want to go with the listing gains.
Besides the personal goal, the second most crucial thing one needs to understand is the basics and the financials of the company. You need to look at the fundaments and liquidity of the company. Finding answers to the questions like what kind of company is it, how is the sector to which the company belongs is performing and is anticipated to perform, is the company a leader in the business or is it growth-oriented, if it is in the retail sector then what are the customer sentiments, etc will help you gauge the company.
In the case of SBI Card, we all know it is a leader in the industry, chances are it will do well in the long-term and the same goes for Mazagon Dock, which being a defence public sector undertaking shipyard it is most likely to do well and this will help you a lot in the decision making process.
Apart from these, you should also look at the competition the company is or will be facing and from whom? You should check if there are any litigation issues and also look up the top management. All the vital information you require to make a decision is normally available in the DRHP (draft red herring prospectus). A DRHP is a preliminary registration document also known as an offer document.
Here are a few things that you should look for in a DRHP:
Details about the management team and the promoters' background: This is the first thing an investor should look for, as the top management and the promoters are the most important assets of a company that can give you an idea about the work culture.
Strengths of the issuer (the company offering the IPO): Understanding the issuer's strengths, its positioning and strategies help investors identify the prospects for the business.
Examine financial summary: Analysing the financial reports for the last few years and checking if there have been any significant positive growth numbers can help you estimate how the company will perform once listed.
Purpose of the issue: It is vital to understand how the funds will be utilised after the IPO. If it is for business expansion or for funding the existing business, it will give you an idea about the company’s future. Further, one should also check the promoter shareholding before and after the IPO and always remember, the higher the promoter shareholding, the better it is for the minority shareholder.
Evaluate the valuation: Evaluating the valuation is important to better understand the company’s position. Comparing the company financials, both current and historical, with the IPO price will give you the company's valuation. Understanding if the IPO is overvalued, reasonably priced or undervalued can be a crucial driving factor when it comes to making a decision.
Inputs from anchor allotments and research notes: Research notes published by brokers or reliable analysts can give you a comprehensive idea about how an IPO will perform. In case you do not manage to run through all of the points mentioned above, these notes can be quite helpful.
Investing in good IPOs can be extremely rewarding and motivating, especially for those who are planning to enter the market through them. And, like I always say, the stock market is all about taking informed decisions. A little awareness and due diligence from your end can take you a long way.
(Prakarsh Gagdani, CEO at 5Paisa.com)Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.