10 Things You Must Do Before Buying An IPO, But Nobody Tells You About Them

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10 things you must do before buying an IPO, but

nobody tells you about them

ETtech

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The stock market is all about timing – when you enter the market and when you exit it.

Synopsis
With a large number of IPOs lined up for the coming months, Calendar 2021 is believed to be a record year for
investing in IPOs in India. The IPO stocks that were listed in 2020 are now trading above their issue prices, with
some having gained as ...

By DK Aggarwal, ET CONTRIBUTORS
18
Last Updated: Jul 17, 2021, 05:23 PM IST

This year, driven by an abundance of liquidity and investor frenzy, Indian

companies have raised more than Rs 27,417 crore through initial public

o erings (IPOs) in the rst six months, the highest in at least a decade. However,

most of the funds raised through IPOs were used to o er an exit to existing PE or

VC funds or existing shareholders and promoters.

With a large number of IPOs lined up for the coming months, Calendar 2021 is

believed to be a record year for investing in IPOs in India. The IPO stocks that

were listed in 2020 are now trading above their issue prices, with some having

gained as much as 400% since listing. All these make IPO investing an exciting

option for investors looking to enter the market. There are a few big names like

Paytm, Bajaj Energy, Nykaa and LIC slated to hit the market before the end of

this nancial year.

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However, one needs to understand that just like the stock market, IPOs come

with a fair share of risk, and due diligence is required before investing in them.

Should you decide to invest in an IPO, here are some points to keep in mind:

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1. Always Read the Red Herring Prospectus: The Draft Red Herring Prospectus,

or DRHP, is led by a company to Sebi when it intends to raise money from the

public by selling shares of the company to investors. DRHP also elaborates how

the company intends to use the money that will be raised, and the possible risks

for investors. Thus, investors must go through of the DRHP before investing in

an IPO.

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2. Utilization of the Proceeds: It is very important to check how the proceeds

raised from the IPO will be used. If the company says only debt will be repaid,

then it might not be an attractive choice to consider, but if the company plans

to raise funds to partly pay debt and expand the business or use it for general

corporate purposes, then it shows that the fund will actually ow into the

business, which is good for an investor.

3. Understand the Business: Before investing, one should understand the

nature of the business the company is in. Once she has understood the business,

recognising the new opportunity in the market is the next step. Because, the

magnitude of the opportunity and the company's capacity to capture market


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share can make all the di erence when it comes to growth and shareholder

returns. On the ip side, an investor should stay away from an IPO, if the

business activities are unclear as an investor.


4. Promoter background and management team: An investor should closely

check who is running the company. It is important to take a look at the

promoters and managers of the company, who play a key role in all its

operations and functions. The company's management is responsible for

driving it ahead. The average number of years spent by the top management in

the company also provides an idea about its working culture.

5. Company’s potential in the market: With increased awareness about the

company around the time of an IPO, investor can analyze the potential of the

business in its market to understand the future prospects. If the company

performs well after raising capital, investors will gain high returns on the

investment made during the IPO. The company that comes out with an initial

public o ering should have a good business model to sustain in the future.

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6. Key strengths and strategy of the company: Investors can gure out the key

strength of the company from the DRHP. One should also try and nd out the

company’s position in the industry it operates in. By reading more about the

company, its positioning and strategies, one can have an idea about its future

prospects of the business.

7. Financial health and valuations of the company: Financial performance of

the company needs to be checked in the context of whether its revenues and

pro ts are growing or falling over the past few years. If the revenues and pro ts

are increasing, it would be a good investment. Investors should try to

understand the company’s nancial health before buying an IPO. One should

also check the valuations, because the o er price may be undervalued, fairly

valued or overvalued, depending on the industry parameters and pro tability

ratios.

8. Comparative valuation of the company: Investors should closely study the

peers of the company. The DHRP will have comparisons with the peers –- both

on nancial numbers and valuations. One can look at the comparative

valuations to check if the company’s valuations are in line with its peers or not.

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9. Major risk factors: Investors can gure out the risk factors from the DRHP.

Reading the risk factors is vital to ascertain if there are any major concerns or
risks associated with the company. At times there are certain litigations and

liabilities, including contingent liabilities, which can pose a threat to the

company’s future business prospects.

10. Investors’ Investment Horizon: An investor should have a clear investment

horizon. One has to be clear if she is planning to invest in the IPO to make a

quick pro t on the listing day or does she want to hold the shares longer.

Because a short-term strategy would depend on current market sentiment,

whereas a long-term one will depend on the fundamentals of the business.

Besides, an Investor should do her own share of research. If she believes in the

long-run growth potential of the company, only then should she consider

investing in the IPO. Do not evaluate an IPO based on grey market premium.

IPOs can sometimes mean great opportunities to buy a share at a price that one

can call a steal. So if one comes across a company that is valued below what it is

actually worth, one should surely make use of that opportunity. However, one

should invest in an IPO only if it is in sync with her nancial goals and risk

appetite.

The stock market is all about timing – when you enter the market and when you

exit it. Sometimes, the timing is right during the IPO and sometimes, it’s better

to wait. Make a decision depending on how much risk can you take and how

good the fundamentals of the business are with respect to its valuation. Be

sceptical, When it comes to the IPO market, a sceptical and informed investor is

likely to fare better.

(DK Aggarwal is the CMD of SMC Investment and Advisors)

(Disclaimer: The opinions e pressed in this column are that of the writer.

The facts and opinions e pressed here do not re ect the views of

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