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Applying for IPO, Check Out For These Details

September is going to be yet another month where many companies plan to come up with their IPO. Historically, whenever the stock market has surged lots of companies line up their IPOs as investors sentiments in a rising market are positive and they want to participate more actively. The constant growth in their equity portfolio during the bull market keep prompting them to invest in IPOs as well. The present situation is such where many investors just want to apply for most of the IPOs as it continues to trend among investors and some of the other known people of investors are investing in it. Investing in IPO is like showing confidence and belief in the future growth of the company. However, investing just for listing gain where the share price of the listing companies is expected to rises during the initial listing should not be the only reason for investing in IPOs. Not all the companies that come up with their initial offer are for investing and a lot depends on your risk appetite. Here are some important factors that can help you evaluate IPOs and take a more informed decision.

Business opportunities & strength

When you invest in the stock of the company, you invest in its business and prospects. Reviewing the company, its management, business model and past performance can help make an informed decision. The red herring prospectus on SEBI’s website can be useful to gather information about the listing company. As an early investor, conviction about the business model, financial health and growth potential of the company highlight strength of the company. Offering any unique proposition or product can be an added advantage for the listing company if there are no other listed company is offering it.

If you come across a company where their revenues had increased suddenly just before the IPO, you may want to follow a more cautious approach on that company and checkout for some information. Also, there could be a scenario where the company would have tried to show high revenues or profit by reducing their costs and not from business operations. Consistency in the business numbers and revenue over the long term are signs of a good company.

Promoters plans after IPO

There could be multiple reasons for a company can come up with its IPO. The promoters who have successfully build the company up to the IPO stage should ideally show more conviction to remain invested and grow it further. The holdings of founders and initial shareholders can help decide the intentions of the promoters or early investors. If they plan to cash in and exit the company, then it may suggest a lack of faith in the company’s future growth. If the company is expected to grow after IPO, the promoters or investors would like to stick around. The lesser the dilution the higher the faith in the business. If the dilution is high then it could be seen as an alert.

High Profiled Investors interest in IPO does not ensure its success

The interest of FIIs and high profile investors in many of the listing companies could be for different reasons and their criteria for investing may not necessarily match with your profile or need. It is good to know such FIIs or high profile investors investing in an IPO, but it should not be an indicator of investing in it. Also, these investors have dedicated teams to make investment decisions and most importantly their risk-taking ability is different compared to ours. Their investment portfolio is also much different from that of any retail investor.

Utilization of raised capital

The prospectus of the company does highlight how the company plan to use the money raised through IPO. The company may plan to invest in developing new products, expanding its reach, improving infrastructure, invest in new technology, acquiring companies etc. Such utilization of the raised capital can be rewarding for its shareholders. However, you may like to stay away from companies that plan to repay their long term debt.

Valuation could be high

In an ideal scenario, the promoter and early investors of the company would like to limit dilution of their stake and they can command a high price. Valuation risk is one of the risks that will always be in IPO investing. Price-to-Earnings (P/E ratio) and Price-to-Sales (P/S) are two commonly used ratios to check the valuations of the companies. You can also check out these ratios of competitors to see if the IPO prices are fair or expensive.

There are multiple factors in deciding on IPO investing, above ones can help you to make more informed decisions. Stock market investment requires a lot of trust and patience as you are participating in the growth story of the companies which happens over the years and not very soon.