10 things to keep in mind before choosing and investing in an IPO - IPO Reviews

Monday, March 26, 2018

10 things to keep in mind before choosing and investing in an IPO

Investing in an IPO (Initial Public Offer) is not merely putting some money and wait for selling it off during the listing day. An investor has to look at the fundamentals of the company that will indicate the future prospects and growth. So, what are the checklists you need to verify before choosing an IPO for investment?

10 things to keep in mind before choosing and investing in an IPO

Checklists to verify before you apply for an IPO:

  1. Look at the company's area of business and see if its business is understandable. This is why because, most experts and investors did not yet understand how to value the life insurance business in India. Hence the stocks like ICICI Pru, SBI Life have undergone more volatility than the others.
  2. Does the business has good long-term prospects? This is an important thing as having a long-term goal along with growth prospects is key to earnings growth for a company.
  3. Look at the management. Having a good management with a mediocre business growth is sustainable than having a poor management with robust business growth. Good management coupled with robust growth is anyhow agreeable. Example, take the case of HDFC Standard Life. The stock is overpriced during the IPO but due to the great management backing by HDFC group, the stock has given around 40% gains within a few trading sessions post-listing.
  4. Always go with a stock or an IPO, which has more than 50% promoter holding share. More their share, higher the growth prospects.
  5. Next focus should be on the financials. The 5-year earnings growth, Margins, Profits after Tax (PAT). Look for the companies with more than 15% growth in the past 5 years and with more margins on the business. Also, focus on return on equity and not the Earnings per share (EPS). Know about the company cash flow and liquidity.
  6. Debt-free company: Always choose the company which has low or nill debt sitting on the books. Or at least the company should use the cash generated from the IPO to pay the debt.
  7. Look at the market conditions during the IPO period. This is because how good the company be if the market condition is not good during the listing day, you may incur losses.
  8. Know the Grey Market Premium per share of the IPO running in various cities. Higher the GMP, more the listing gains.
  9. Focus on the HNI/NII subscription figures. It is advisable to invest in an IPO if the HNI/NII subscription has crossed at least 15 times. Higher the NII subscription, more the listing gains.
  10. Lastly, see if the overall subscriptions have crossed at least 10 times.

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