HOW TO READ IPO's ?

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 Here is a structured framework on how to analyse an IPO offer

  • Download the DRHP document
  • Understand the IPO Offer & objects of the offer
  • Develop an understanding of the Industry from the DRHP
  • Analyse the company’s business, financial performance and future growth prospects
  • Understand the strengths and risks of the company
  • Calculate the valuation of the IPO offer and compare it with the listed peers (also present in the DRHP)

What is a DRHP document?

A DRHP (Draft Red Herring prospectus) document gives all the details, as mandated by SEBI, about the company and the IPO. We recommend that every investor should read the DRHP to make an informed decision of investing (or not investing) in the IPO. The good thing is that all the DRHP documents follow the same format / structure and this makes analysing it a bit easy. DRHP can be downloaded from the following sources:

  1. SEBI
  2. BSE main board or BSE SME or NSE website
  3. Company’s website (Investor Relations section)
  4. Investment banker for the IPO may also have the DRHP document on its website

Once you read the document, you will also realise that the price of the IPO shares is not mentioned in the document. The price is announced 2 days before the IPO opens (you can apply for the IPO through your stock broker)

Along with the DRHP, you should also look at the Basis of Issue document to understand how the IPO pricing was determined



How to analyse an IPO — Key things in the DRHP

Investors should look for the following sections in the DRHP to understand more about the company’s business, financial performance and offer of the IPO. DRHP will contain sections such as:

  1. Our Offer & Objects of the offer — This section will tell you the reason why the company is coming up with an IPO. Typically, an IPO will consist of a fresh issue of shares and an offer for sale. The fresh issue of shares will give the company money that it can invest and objects of the offer will detail out how the company will utilise the funds. Offer for sale consists of the shares that the current investors are selling in the IPO. Having an offer of sale component is not a bad thing in itself. However, if the size of the offer for sale is large, investors should understand why it is so
  2. Industry overview — This subsection is covered under the ‘Our Company’ section in the document. Industry overview gives you the bigger picture or the macro trends for the industry such as market size, potential growth rate of the industry and key industry parameters
  3. Our Business — This subsection is also covered under the ‘Our Company’ section in the document and will give you a good understanding of company’s operation, segments and other details
  4. Financial statements — The Company will generally provide last three year financials and the current year’s available quarterly details. While you should look at the financial statements in details, three key things to look at are:
  5. Growth rate — You should look at how the revenue has grown in the recent past and if the company can continue to grow at a similar rate in future as well
  6. Profit margin & return ratio (ROE) of the company — You should evaluate and see if the profit margin is stable / increasing / fluctuating and if the company can maintain similar profitability in the future as well
  7. Operating cash flows — As an investor, you own a piece of the business, and you would want to own a piece of a business which generates cash flows from operations and such cash flows should ideally be increasing annually
  8. Shareholding pattern (before and after the listing)
  9. Management and Promoter details
  10. Company Strengths — DRHP covers strengths in detail and this will give you an understanding of the competitive edge of the company and if the company will be able to sustain it in the future
  11. Risk Factors — We strongly recommend you to go through this section to understand if the company is any significant red flag such as litigation, tax notices and others
  12. Valuation — Investors should always compare the P/E ratio for the company with that of the peers in the industry to understand if the issue is overpriced, fairly priced or underpriced. The list of peer companies is also available in the DRHP

Disclaimer: The guide is meant for learning purposes only and should not be construed as investment advice

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