What is an IPO?
An Initial Public Offering (IPO) is the process by which a company issues its first common shares to the public. This is the process by which an unlisted company, not listed on the stock exchange, raises capital. The company shares are then listed on the stock exchange after the process is completed.
Before investing in an IPO, here are some things to keep in mind
1) Background of the company – Learn about the company’s business model, products, and revenue mix (Based on geography, product, and region).
2) Client Base – Name of Clients, Total Clients. Are they big or small clients?
3) Industry – The industry where the company is active. The industry’s current and future outlook.
4) The Offer Price vs. the Earnings Per Share – The offer price is the price at which the company will sell its shares to the public. The earnings per share (EPS), is the net profit divided by the total shares. It is an indicator of a company’s profitability. Find out how many times the price of an offer is greater than the company’s EPS. Example: Company A has an IPO. The price range is Rs 120 -150. The EPS for Company A next year is Rs 30. The offer price for Company A is Rs 30. Consider the higher price in the price band (Rs150). If the multiple is higher, it indicates you are paying a premium for the share.
5) Lead Managers – Check out the Lead Managers for the IPO issue. A good brand reputation is a sign of quality. Important: Good lead managers will not be happy to work in companies that are below average and will not be accepted.
6) Red Herring Prospectus- Carefully read the prospectus and examine all risks associated with the company.
Investing in equity shares carries a high level of risk so make sure you read all information before investing in an IPO. The risk of an IPO is the same as that of a share. Make a decision based on your risk appetite. Most of the information will be accessible on the red herring prospectus as well as the company website of Lead Management.