by Team StockmarketX
294
Hello Investor’s,
In this blog post, you will learn about all the points that need to be analysed before making a decision to invest in any IPO.
Table of Contents
I hope you know what an IPO is if you did not learn here.
Why Analyze Before Investing?
Investing in IPOs is not just about going and picking a company that seems good to you and invest. It is all about doing your homework to ensure that the company’s growth matches your investment goals and risk capacity for short and long term.
Analyzing an IPO involves looking at various aspects of the company to make a decision about investment.
Key Factors for to analyze for IPO investing
As a first step, you have to download the DRHP/RHP from SEBI or the NSE website.
Follow 👉 How to download DRHP/RHP
1. Objects of the Offer:
Every RHP has a section called “OBJECTS OF THE OFFER” and in this section we have “Utilisation of the proceeds” which companies have to mention the utilization of the money. It means what company is going to do with how much money.
2. Business Analysis:
First of all, you have to know what the company is doing, how they are operating, and in which segments they are operating right now. To get all this information, go to the “OUR BUSINESS” section in the RHP document.
Now question is: What do you have to look at this section?
1. You have to look into their products and the contribution of those products to revenue.
2. Know about the strengths of the company, like any big contracts or orders from a big client or any international client.
3. Take a look If the company is manufacturing anything, then the source of their raw material is important because there can be chances of discontinuation of that raw material due to any reason. Also, the manufacturing units of the company and their capacity.
4. Sales & exports of their products.
5. Strategies and there future plans for growth.
These are the key points you can take a look at.
3. Industry analysis:
We must do industry analysis because if that particular industry is doing well, then the chances that the company will do well in the future will automatically increase. In order to do industry analysis, you can refer to the ibef.org website, go to the industry section, select your desired industry, and then read about it. After that, you can go to the RHP document. There is a section called “INDUSTRY OVERVIEW - OUR MARKET OPPORTUNITY” In this section, the company must have mentioned industry growth and future expected growth in terms of CAGR. There are some comparisons between global industry and Indian industry growth. So please take a look at it.
4. Financial analysis:
In the RHP Document, there is a section called “FINANCIAL INFORMATION” In this section, we have the company's financial statements. Here you will get all the information about last 3 years of data like balance sheet , cashflow from operations, CAGR % and many more things.
You can also check if their CAGR rate is higher than the industry CAGR rate. If it is higher, we are good to go. You can also read about balance sheet and cashflow from operations, etc.
5. Company Analysis:
In the document, there is a section called “OUR MANAGEMENT” In this section, you can read about who all are the board of directors, who is in there management teams, how they have experience, etc. then go to “CAPITAL STRUCTURE” section of the document to learn about how many shareholder this company has, how many share there are, At what price they got the shares, and how much profit they made by their investment All this information can be read in this section.
6. Risk analysis:
To learn about risk, there is a section called “RISK FACTORS”. In this section, you will get information about risk factor. You have to think and analyse things like if company has 10 client and only top 3 clients are giving 90% revenue. If any one from top 3 client gone then revenue may effect drastically.
7. Check legality:
In “LEGAL AND OTHER INFORMATION” section, you can find out all the legal information, like how many cases this company or its management team has. There should not be big and serious cases.
8. Valuation:
This is a little bit trickier to know about the valuation of any company. The valuation of any company is done by qualified merchant bankers. Generally, the PE ratio is the best parameter to know about the valuation of any company. If a company has a high PE ratio, that means stocks are expensive and the price of the stocks may fall in the future, On the other hand, if the PE ratio is low, then the price of the stock may increase in the future. But the PE ratio is not mentioned in the document.
But you can calculate the PE ratio yourself.
Follow 👉 To calculate PE ration.
