Today let us discuss on how to differentiate between good IPO and Bad IPO.Whether you are looking to apply for listing gains or for long-term investment, understanding why companies go for IPO is equally as important which will increase your chances of striking a good deal and avoiding the bad IPO.
1. Is the IPO stock price over valued?
Many argue that IPO valuations are often expensive because of the current economic condition, business position, industry outlook etc.
Normally, the price valuations are pegged to price-to-earnings ratio or price to book value that is comparable to the industry.The question you should ask is whether the performance of the year is sustainable and will they be able to achieve similar results or even better in the coming years.
2. Why are the Promoters or Investors divesting their stake?
Proceeds from the IPO would go to the Company if the company is coming with fresh issue.
Existing Promoters/Investors cash out by selling their shares to you and the proceeds would go to themselves instead of the company.
Investors will be eventually own the company stocks, so any money proceeds from the IPO going back into the company is more favourable than otherwise.
The various reasons why the company is coming with IPO are as Follows:
Urgent need of cash to repay debts and borrowings
Unlocking value at current valuations
For Strategic Acquisitions/Expansions.
3. What to read in the IPO prospectus?
Like any other investments opportunities, proper study and research on the company is very important.
Having access to a personal professional investment advisor will make life much simpler, but for many, they have no choice but to analyse by themselves.
For a start, it is a good idea to know which industry the company is operating in, the management team as well as its business model and future growth prospectus.
Next, read the industry trends and business outlook report etc such reports is prepared by research agencies and will usually contain tons of useful data and statistics on market trend and their outlook for the industry.
Some large stock brokers do provide some professional analysis and summary of key information picked from the prospectus so you may also rely on those reports.
Take note that there are forward-looking statements which should be read with caution. Statements such as expectation of sales or earnings to grow by a double-digit in three years time may solely based on their own estimation and are usually not substantiated.
Use your own Knowledge to determine if the sales or earnings forecasts are reasonable and justifiable.
4. Bankers reputation and their past performance
Lead Managers are engaged by the company when they are going for an IPO and part of their work is to prepare and publish a detailed thick booklet called the ‘Prospectus’ which has all the required information as regulated by SEBI.
Believe it or not, many argue on judging an ongoing IPO stock performance to the performance of the Lead managers previously engaged IPOs but this should not be the criteria, the only criteria should be company’s fundamentals , Track record of the management and the future growth prospectus for the company
5. Why do investors think that IPOs will give huge listing gains on Day one?
After getting allotment in the IPO (If you are lucky) everyone is excited with the IPO , if the growth potential of the company is good the in such cases the IPO price may be the lowest in the entire history of the company.
Many times what happens is that you may have seen that IPO Stocks are Oversubscribed by multiple times, but many people fail to understand that over subscription does not guarantee that the stock will have good listing because some times what happens is that the market is performing very well and many IPOs in the past have given good return to the investors and in this euphoria, some companies which may not be good in terms of fundamentals or the future growth, still many people ignore the facts and apply for the IPO and by the time it is about to get listed the market sentiments has reversed and the result is losses.
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