How to analyse an IPO

Investing in an Initial Public Offering (IPO) lets you own a part of a company as it starts trading on the stock market. For many, IPOs can be exciting since you’re joining in the company’s growth journey. But IPOs come with some risks too. It’s important to know what to check before investing. This guide will help you learn how to analyse an IPO, see what to look for, and make smart choices for your money.

What is an IPO?

An IPO, or Initial Public Offering, is when a company offers its shares to the public for the first time. Before the IPO, the company is private, meaning only a few people or groups own its shares. During an IPO, the company works with an investment banker. This banker sets the price and prepares the shares for sale to everyone. Now, people like you can buy these shares through a trading app or your demat account.

Since IPO shares are new, they don’t have any past data. This means you can’t look at past prices or earnings. Because of this, it’s good to consider other important factors to understand if the IPO is worth investing in.

Key Factors to Consider While Evaluating an IPO

Here are some key things to look at when you want to analyse an IPO:

1. Market and Industry Trends
   Look at the market as a whole. Is it stable, growing, or going through problems? Also, check the company’s industry (like technology, healthcare, or finance). Is it growing? Are there any big changes happening? Learning about the market and industry helps you guess if the IPO will do well.

2. Draft Red Herring Prospectus (DRHP)
   The DRHP is a document with details about the company’s finances, goals, and growth plans. You can find this on SEBI’s website, stock exchange websites, or the company’s own site. Go through it to understand how strong the company is financially. Also, check the news, financial reports, and ratings from agencies like CRISIL or CARE to get a complete picture.

3. Financial Ratios
   Financial ratios are numbers that help you see if the IPO price is fair. Some common ratios include:

• Price-to-Earnings (P/E): Compares the company’s stock price to its earnings.

• Debt-to-Equity Ratio: Shows how much debt the company has compared to its own money. These ratios help you decide if the company’s IPO shares are worth the price.

4. Future Growth Potential
   Look at the company’s plans for the future. Is it introducing new products or expanding to new markets? If the company’s plans look strong, it may be a good sign of future growth.

5. Management Team
   A strong team can make a company successful. Learn about the people leading the company. Have they done well in the past? A strong management team shows that the company is in good hands. If the team is selling too many of their shares, it could be a warning.

6. Use of IPO Proceeds
   Companies raise funds through IPOs to use the money for business growth. It’s a good sign if they are investing in new technology, expanding, or improving products. If the main goal of the IPO is just to pay off debt, it’s worth considering carefully.

7. Pricing and Dividends
   Check if the IPO price is fair compared to similar companies. Also, see if the company pays dividends, which means you could earn some income in the future.

8. Over-Subscription
   If an IPO is in high demand, it may be oversubscribed. This means many people want to buy the shares, which can raise the price. Having a good relationship with a broker can help secure shares in popular IPOs.

9. Choosing a Reliable Broker
   Picking a trusted broker is important. A broker with experience and good advice can help you make better investment choices.

10. Institutional Investor Interest
    When large investors like institutions or wealthy individuals invest in an IPO, it may be a good sign. But remember, this should not be the only reason to invest. Always do your own research.

11. Using Technology
    Advanced trading apps and portfolio tools make it easier to analyse IPOs. Some apps use AI to provide recommendations. But double-check with a financial advisor for the best results.

Analysing Market Conditions and Timing

The market affects how IPOs perform. Here are some simple ways to check market conditions:

• Market Sentiment: Check the general mood of the market. Are people positive or worried? Positive moods often mean higher prices, while negative moods might mean lower prices.

• Industry Trends: Is the company’s industry doing well? A growing industry is a good sign for the IPO.

• Timing: Look at the timing of the IPO. A strong market time could make IPO shares perform better.

How Do Market Conditions Affect an IPO?

Market conditions have a big impact on IPO prices. In a bullish or positive market, people are more hopeful, which can raise IPO prices. In a bearish or negative market, investors are more cautious, and IPO prices may be lower.

Conclusion

As the market keeps changing, it’s easier to track IPOs with technology. A trading app or portfolio app helps you stay informed about IPOs and market trends. For a smoother experience, you can try using the Bajaj Finserv app to manage your investments.