How to Analyse IPO

Going public through an Initial Public Offering (IPO) is an exciting time for both the company and its potential investors. An IPO is the first time a private company offers its stock to the public, making it a publicly traded company that allows anyone to buy and sell shares. 

Investing in an IPO gives you a potential for higher returns, diversification and allows you to purchase shares early enough to benefit from future growth. However, before investing in an IPO it is important to study every aspect of it to ensure your risks are manageable. 

In this article, we explore how to study an IPO so that you can make smarter, well-informed decisions. 

How to Analyse an IPO

Analysing an IPO is a multi-step process where you have to consider various aspects of the IPO, the company offering it and the market conditions at large. Here's how you can analyse an IPO through these aspects: 

1. How to Analyse the IPO Stock Prospectus? 

To analyse an IPO, start with its prospectus that contains valuation ratios like Price-to-Earnings (P/E), Price-to-Book (P/B), and Price-to-Sales (P/S), these tell you if the IPO is fairly priced. Apart from this check how the company intends to use the funds raised through an IPO. Make sure that a large portion is being used for strategic and expanding operations. 

You can also check the Draft Red Herring Prospectus, a preliminary prospectus filed with SEBI with all the key information. 

2. How to Analyse an IPO Offering Company and Financial Performance? 

The next step is to check that the company has been showing consistent and healthy revenue growth and sufficient profit margins for the last 3-4 years. You can go through the company's publicly available financial statements to ascertain this. Also, verify that the company's earnings per share is growing, debt is manageable, and there is a positive cash flow from its current operations. 

You can use Porter's Five Forces framework to understand how the company is positioned within the competitive dynamic of the industry by analysing competition, threats of new entrants and substitutes and the bargaining power of buyers and suppliers. 

3. How to Analyse Market Trends?

The dynamic surrounding the company is as important as the IPO offering and the company's performance. Watch closely for emerging industry trends, how the industry has performed historically, what its key growth drivers are and the overall health of the industry. Check whether there are new entrants or technologies that may threaten the company's position. 

Since IPOs are highly susceptible to market volatility, look out for market conditions that may lead to sudden price fluctuations in the early days of trading after the IPO. 

4. How to Analyse Investor Demand? 

Lastly, if the investor demand for an IPO is high, the IPO is more likely to be successful. Watch subscription levels closely as higher subscription numbers indicate a stronger interest. However, oversubscription to an IPO  may cause fluctuations in the days after the IPO. 

You can also look for signs of interest from institutional investors including mutual and pension funds. These investors usually conduct extensive research and study the IPO thoroughly before investing, so their interest can be a positive sign.

Wrapping up 

While an IPO can offer you an incredibly lucrative opportunity, investing without enough research or analysing, the offering can lead to huge losses in the long run. Apart from following the analysis strategies mentioned above, it is also important to invest through a reliable and secure platform. 

Tata Capital Moneyfy offers you just this with a range of tools to help you invest and grow your wealth successfully. Our team of experts actively gives you advice and guides you through the investing process so that you can make the most of your investments. 

To know more, visit the Tata Capital Moneyfy website or download the Tata Capital Moneyfy App today!