5 things to look for IPO Investing
5 things to check before investing in IPO:
IPOs and Investing in them always require detailed analysis, but Information regarding Public Issues are scarce. In this blog we are going to check the aspects to check before investing in these IPOs.
1 Analyze the company thoroughly: In a new company, finding the relevant data is a difficult task. But As per mandate, Companies have to provide some data to the investor to help them take informed decisions about Investing in an IPO;
Companies usually disclose parameters such as Price to book value, Price to sales and Price to earnings ratio.
Price earning ratio is the amount of times you are willing to pay for a share with respect to its earnings. (Ex. A P/E ratio of 12 means, the market is ready to pay 12 times the current earnings). Make sure, the issue is price rightly at this point of view.
Price to Sales is the amount of money the market is willing to pay for every rupee worth sale, the lesser it is the better.
- Comparison with Peers: It is important to understand the market before we start investing in IPOs. The P/E ratio of certain sectors are higher, certain sector tend to have a lower P/E. for example, the P/E ratio of Pharma Sector and IT Sector will be high, when compared with PSU sector’s P/E.It is a prudent practice to compare an issue’s P/E with the Average of a sector’s P/E. if the P/E is above the sectoral average, it is Overvalued
If the P/E is below the sectoral P/E, this is undervalued. In this case, we have to whether the stock belongs to growth sector or value sector. If the valuations are high in traditional sectors it I better to stay away from the issue. Share of apple and google where overvalued at the time of listing, but it went on to give multiple times RoI over years in the market. Other parameters such as market share should also be considered.
Listen to regulator’s words: The company has to submit RED Herring prospectus to SEBI for approval. It will have all details about the issue. But It is difficult to read those data. But SEBI Shows concerns for its investors and “Reduces” retailers subscription limits. These are the signals which a retail investor has to look into. If the retailer portion is reduced, the regulator is indicating that it is only for risk taking retail investors. Investors discretion is advised in these case. For Example, Burger King gave only 10% of shares to retailers, as it warned retailers about investing in these issues. (Burger king results were released earlier in the month and It showed a loss of 29 crores).
- GMP: Stocks start to trade in grey markets as soon as book building exercise starts. This is can be in either premium or discount. Premium means listing will be above the cut off price, while the discount price is below the cutoff price. Many retailer check for institutional subscription to invest in IPO, but institutions usually make their bids on the last day. So, GMP can serve as a identifier of price. ( Nureka has no subscription from Institution from day 1).
* Overall Market structure: Many good IPOs were purchased at a discount because of poor overall market conditions, whereas, Many mediocre companies get good prices at good broad market conditions, So it is important to understand the broad market conditions. For example, L&T infotech had a discounted listing in stock markets, but went has given 8 times returns in 7 years of listing.