Things to Watch Out for Before Applying For IPO!
April 13, 2022
Things to Watch Out for Before Applying For IPO!
2021 was nothing short of a blockbuster for IPOs in India with over Rs.1.2 lakhs raised over 63 IPOs. Technology-focused and new-age companies witnessed investor demand with most of these IPOs being oversubscribed and the trend is most likely to spill into 2022 as well.
It’s normal for retail investors to get attracted to this frenzy and try their hand on each and every IPO allotment possible. But is that the right move? After all, the companies you invest in should be in alignment with your investment horizon and risk appetite. In that case, what are the things that you should watch out for before you apply for an IPO? Let’s take a deeper look.
· Points to remember when applying for IPO
Due to large investor demand, applying for an IPO doesn’t guarantee allocation in most cases these days. But that doesn’t mean you should keep applying for everything and hope for the best to happen. The company you are going to invest in should be in alignment with your investment’s goals and risk appetite. Moreover, its ideals and moral values should match with your viewpoints as well. Above all, the company needs to have a strong growth potential so that your investment stays relevant, and you don’t encounter a loss. Following the below pointers will help you with all these.
1. Studying the red herring prospectus
A red herring prospectus is a document filed to the Securities and Exchange Board of India (SEBI) and it contains all the necessary details an investor needs to assess and make a decision about investing in them. Below is a list of things to look out for in the red herring prospectus.
2. Industry overview
Different companies belong to different industries and the industry overview part in the red herring prospectus details the industry to which the company belongs and its current macroeconomic conditions. This section will help you understand what’s happening with the industry and what is its potential for the future.
3. Strengths and strategies
This section in a red herring prospectus will focus on what the company’s strengths are and what is its strategy to use those strengths for a profit. This section is highly important as it details how the company is planning to make money in the future. You can compare these methods with your investment goals and risk appetite to see if they are in alignment. For instance, if a company is planning to aggressively make money, it will reflect in the stock prices as well. If the risk you can accept is lesser than that, it is a better idea not to invest in that particular company.
This section details where the company makes money from. It explains the products or services offered by the company. This is important as you can analyse how the company’s operating sector has fared in the past and what are the potentials for its future. This can become a vital pointer in helping you choose whether to invest in a company or not.
Checking who runs the company is equally important. You could check the history of the management and see how well they have managed things in the past. This could show how well the management can run things in the future and it could be an indicator of how the company will function.
6. Use of proceeds
Proceeds are the money a company plans to raise through an IPO and how the company plans to use them could show you their growth potential. For example, if the company is planning to invest in something that is booming, it could show the company has more chances to make money. At the same time, if the company is planning to use the IPO proceeds for something with not so much potential, that could result in the company not making a profit immediately.
7. The numbers
Lastly, there is nothing more important than the numbers. You can go through the company’s previous results and compare how they have performed over the years. You can also compare the company’s numbers with its peers to see how well they are performing in the sector. Another important thing you can look at is how the company has performed during economic difficulties. This will give you an idea of how strong a company’s fundamentals are. Companies with good fundamentals tend to withstand economic difficulties better.
8. Have a good understanding of the business
Once you are done with the red herring prospectus, it’s time you assess what happening with the company. Understanding their business model is something that can help you decide. Analysing things like how the company has made money recently and how it is planning to make profits in the future is important.
9. Company's potential in the market
Knowing how much potential a company has in the market is equally important. The potential might end up being the indicator of how the company is going to perform. The key here is to analyse the industry in which the company falls and the performance of its peers. Sometimes, a lot of competition in a well-performing industry can even hamper a company’s performance and hence, reading between the lines become important.
10. Investor demand
Assessing investor demand is also important. It acts as an indicator of how much potential the company has. Too little demand could often mean that investors see no evident potential in the company growing their money.
11. Major risk factors
Assess the major risks the company faces. This could be competition from peers or government regulations. Understanding the risk factors and assessing how much the company can overcome them becomes important in making an investment decision.
· A word of caution
Stock markets are often unpredictable, and IPOs are no exception. Sometimes companies can fail even without any red flags. The important thing here is to make sure you are adaptable and flexible. Make sure you have backs ups if you happen to lose money and if the IPO is not allotted to you. A successful investor is always a cautious investor. Happy and safe investing!