Introduction
2021 was a bumper year for IPOs (Initial Public Offerings) in India. Over 63 companies went public and raised a record Rs. 1.2 lakh crores in funds.
But this wasn’t just great for the companies going public—it was also an excellent opportunity for retail investors.
IPOs offer investors a quick and easy way to build their wealth. For instance, after Sigachi Industries’ IPO last year, its share price went by 252.8%!
That means that IPO investors who had paid the Rs.163 issue price for the company’s stock could now sell it and get 2.5x returns.
However, many popular companies’ blockbuster IPOs have also let down investors.
For instance, Paytm stocks fell 27% on the very day the company went public, causing investors to collectively lose Rs. 2,835 crores.
So, how can you decide whether a company’s IPO is worth bidding on or not?
Things to Keep in Mind Before Bidding for an IPO
Read the Draft Red Herring Prospectus
Before any company goes public, it needs to get SEBI’s approval. It files a draft red herring prospectus (DRHP) to get this approval.
This contains all the details about what the company plans to do with the money it raises in an IPO and the risks to investors. So, this is a must-read for all investors.
Company’s Financials
The DRHP will tell you how the company is performing, whether it is making profits or losses, and so on.
It will also tell you how the company plans to use the money it has raised.
If the company simply intends to pay off its debts, it is not such a good idea to invest in its IPO.
But if it plans to use that money to grow its business, investing in the company could be a good idea.
Company’s Valuation
The company usually declares the valuation it is seeking after raising money from the IPO.
By looking at and evaluating its finances, you could analyse whether or not the company is overvalued.
It is generally not a good idea to bid on an overvalued company. You should take your chances with companies that are undervalued or fairly valued.
Company’s Business and Business Model
If the company doesn’t have a strong business plan or business model, investing in it could invite major risk.
And if you’re not sure how you feel about the business model, ask yourself: do you believe in what the company is trying to achieve?
If the answer is no, you shouldn’t bid for its IPO.
Shortcuts to Understanding IPO Bidding
If you do not have the time or the expertise to conduct in-depth research about a company that is heading for an IPO.
There are a few shortcuts you can take to understand if you should bid or not.
IPO Subscription
You need to check how many times individual and institutional investors have subscribed to an IPO.
If an IPO has been oversubscribed, it means the demand for the company’s shares is high.
So, there is a good chance that people have already researched the company and decided that it is worth investing in.
IPO Underwriters
Each company that goes public has to have an underwriter.
This underwriter evaluates the company’s financials, offers advice on how much the issue price should be, and so on.
Usually, this job is performed by an investment bank. By looking at a company’s underwriter, you can understand whether it is worth investing in or not.
For example, if a bank like Goldman Sachs is underwriting a company’s IPO.
You can rest assured that the company will be fairly evaluated and worth investing in because a large, trustworthy bank will not choose to provide services to a sketchy company.
It will mostly choose quality companies and evaluate them fairly.
How to Bid in an IPO?
To invest in an IPO, you need to have a Demat account. If you don’t have one already, you can create it for free on Rupeezy website.
Astha Trade also makes investing in upcoming IPOs and checking your IPO allotment status very simple and easy for new investors.
Conclusion
There are several risks involved with investing in an IPO, but it could also make you a millionaire.
For instance, when Reliance launched its IPO, its share price was Rs. 10. But the company’s stock is now trading at over Rs. 2,000, giving initial investors 200x returns.
So, take a close look at the upcoming IPOs of 2022 and try to spot the one that can make the most of your investment.