The IPO frenzy has been a key contributor to the rapid growth in the number of demat account holders in India.
While IPOs offer investors the opportunity to invest in strong companies, the offering price alone should not require subscription. Just like investing any share of an already listed company, the decision to subscribe to an IPO must be the result of a thorough analysis.
From fundamentals to financials, it is imperative to understand the different facets of a business before you get to the point where an investment decision needs to be made.
Even at this point, it’s all rushing in the strength of its perspective and the likelihood of it being aligned with the reality the future holds.
However, at a high level, there are three metrics that should help a newbie get a solid foothold in the public offering.
An IPO is nothing but an offering of company stock that basically involves the right to participate in the prospective growth (or fall) in the value of the company.
Just as one would begin to assess the viability of any business idea, evaluating an IPO-related business begins with understanding the products/services offered by the business, the competitive landscape, and growth prospects. of the company.
You need to look for reasons to believe that the company provides a high quality product/service that will continue to experience significant sales growth, while maintaining significant control over the price of the product.
Now, there can be a number of factors affecting the strength of your view on the above premise. It depends on the nature of the business and the environment in which it operates.
Some popular factors applicable to most businesses include market share, product/service substitutability, and vulnerability to changes in policy, regulation, technology, and any other applicable environment.
Along with the business, it is imperative that the financial condition of the business also grows and strengthens at a reasonable or higher rate.
A company’s financial condition also provides insight into the company’s effectiveness, efficiency and prospects. Different businesses operating in different environments have unique financial characteristics.
These financial characteristics should be considered in the context of the company’s unique situation and in comparison with peers operating in as similar segments as possible. Most financial characteristics are measures in the company’s financial statements.
Some examples of widely analyzed financial metrics include revenue growth, profit margins, expenses, and a variety of applicable ratios.
Now that’s tricky. A good starting point would be to compare the applicable ratios with those of comparable companies operating in the same segment and already listed while adjusting to its unique context.
The most popular valuation measures are ratios such as Price/Earnings and Price/Sales. Now, the subject of evaluation is as much an art as it is a science.
Every company is unique and commands a separate valuation and nothing says that a company with a lower valuation ratio than its peers makes it more attractive.
An analysis of this ratio should serve as an indicator of how the business positions its value relative to its peers and work should be done to find out if the distinct nature of the business justifies the gap?
There are a number of ways to land a good IPO investment decision, but only a few would be absolutely incorrect.
Investing in basic IPO or hearsay advice such as a bet for listing gains or the basis of sensational media coverage of the offer are ways that top the incorrect list.
While there is much more to a comprehensive IPO analysis, a beginner should strive to build a solid perspective and belief at the same time as the market determines and reflects the true strength of the IPO thesis. ‘investment.
The secret sauce lies in accessing, assimilating and forming a perspective on all available information relating to the issue while constantly assessing the weaknesses of one’s own perception.
(The author is co-founder and commercial director, Fisdom)