Initial public offering is the process by which a private company can go public by sale of its stocks to general public. It could be a new, young company or an old company which decides to be listed on an exchange and hence goes public. Companies can raise equity capital with the help of an IPO by issuing new shares to the public or the existing shareholders can sell their shares to the public without raising any fresh capital. Investing in an IPO can certainly prove rewarding however there are certain things investors must be wary of. Here are a few things that investors should follow before investing in an IPO.
Reading the IPO prospectus is always the best place to start. Download the company prospectus from its official website or even from the SEBI website and thoroughly read it. The prospectus contains information about the company’s financial performance, the reason behind issuing an IPO, the details about the promoters, dividend policy, offer information, details about the management, regulatory and statutory disclosures etc.
UNDERSTAND THE BUSINESS AND GROWTH PROSPECT OF THE COMPANY
Learn about its products and services. It’s important that the company is easy-to-understand and has a fairly straightforward business model. Once you understand the business, identifying the market opportunity is your next step. The growth of the company in proportion to the growth of the market in which it operates has to be seen. The size of the opportunity and the company’s ability to capture market share can make all the difference when it comes to growth and shareholder returns.
The management is the soul of the company. Do the promoters have previous experience in transforming organizations from the grass root level in the same industry to a successful business? What is the experience they have in the sector the company is operating in or any other sector. A good management can prosper the company to new heights. Check for litigation’s against the promoters, nature of litigation and the promoter s extent of liability, if any.
PURPOSE OF LISTING AND THE USE OF FUNDS
As companies going public seek to raise funds from investors, there should be a clear statement in the prospectus about how the money will be used. Knowing where your money is going should be important to you and will play a role in the performance of your investment. Companies that are putting the funds raised back into the business will have a greater incentive for the business to grow.
FINANCIAL PERFORMANCE AND VALUATION
Sound financials are an important factor in the long-term success of the business. This will give you an indication as to how the company is utilising its available capital and the historical growth of the business. The financials will also play into the company’s valuation. To begin with, see how the valuation of the company fares as compared to existing companies in the same industry. You can employ techniques like Price to earnings ratio, price to book ratio and return on equity to judge better.
Investing in the stock market brings a certain level of risk. Company specific risks can be found in the prospectus and should be considered prior to making an investment.
LEAD MANAGERS TO THE ISSUE
The Lead Managers act as a catalyst as they attempt to bring in some credibility to the offer and their accountability is also very high. Remember that the lead manager’s credibility could act only as an indicator to the proposed issue, but does not assure success. There have been poor issues from good merchant bankers in the past.
These are the key points to consider while investing in an IPO. Keep learning and Happy Investing.
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