An IPO can generate buzz. Brand buzz can change minds. There is no substitute for the offer paper.
The prospectus tells you what the company does. It lists its risks, sales, profit, debt, owners, plans and how it will use IPO proceeds. It is guidance for anyone who is learning to invest in IPO shares.
1. Selecting the Correct Paper
The first step is for a company to file a Draft Red Herring Prospectus or DRHP with the SEBI. It’s got the key facts, but not the final price.
Before the bidding opens, the Red Herring Prospectus, or RHP is issued. It has a fresh data and price band. Use it to do a final sanity check on an upcoming IPO.
You can get it from SEBI, an exchange or your broker. Look at the date of it. When off, new RHP, don’t go old draft.
2. Know How the Firm Makes Money
Begin with the business page. Find out what the business sells, who buys it and where the sales come from. Check dependence on a single item, client or state.
Industry page read. Demand note, rules, costs, entry blocks, cycles.
The firm could list its strengths. Consider them as claims. Match each claim to the facts found on the risk and accounts pages. Highlight any ambiguous sales model as a risk.
3. Read the Risk Page
Don’t miss the risk page. There is a lot of detail, but this is information that matters.
Watch for a small client list, a key vendor, one main license, high debt, court cases, swings in costs, tax claims, change in rules or links to promoters.
Identify a trade-driving client or site. Read prior defaults and legal proceedings notes.
All firms in the field share certain risks. Others are related to this company. Break up the two groups.
4. Review the Planned Use of Funds
See the page “objects of the issue”. It tells where the cash will go to. The firm can pay off debt, build a plant, finance stock, buy a company or meet daily needs.
Know the type of problem. In a new issue the cash goes to the firm. In an offer for sale, old owners sell their shares and receive the cash.
Every fund use must be linked to the plan. Paying off debt can make loans cheaper. The new plant may help sales but could be delayed and risk costs.
Read the notes on the sums laid out for general use.
5. Check the key figures
Review sales, profit, cash flow, debt and margin for all years shown. One good year does not make a trend.
Match net profit to cash from operations. Cash held up in inventory or in accounts receivable can increase profit. Check stock days, bill days and short-term fund requirements.
Read the notes on loans, tax and future dues.
Apply simple ratios such as earnings per share, return on net worth, debt-to-equity, margin. Compare them to RHP peers identified. Use the same span and similar trade.
6. Review the Owners and the Board
Check the past work of promoters, board members and key staff. Note their stake, pay, links and roles.
See if promoters want to sell shares. Selling alone is not a mistake. Check its size, cause and effect on their stake.
Notes on fraud, default, court action, conflicts, audit work and deals with linked firms.
7. Terms of issue and price
Note price band, lot size, issue size, bid dates and listing date. Verify whether it is a mainboard or SME problem.
Read the basis of issue price. Price to earnings ratio versus listed peers. Link price to profit, cash, debt and risk.
A familiar name does not eliminate price risk. Based on bid data, there is demand at that point. It does not promise any profits after listing.
In a book-built IPO, retail investors can place their bids at the cut-off price. The high demand could mean you don’t get any or only a small allotment.
8. Do a final check
Write five points down before you apply: business, risks, fund use, key numbers, price. Give your goal , time frame and loss limit .
Bajaj Broking can keep readers abreast of the IPO whether it is live or upcoming. Its IPO pages show dates, price bands, lot size, issue size and DRHP or RHP links. Eligible clients can also apply through its platform through UPI or ASBA. The tool is for the bid, the choice is on the offer sheet.
Conclusion
So the first step to know how to invest in IPO shares is sound checks. Read the last RHP first. Learn the trade, check out the risks, test the fund plan, study the accounts and review the price. Don’t make the bid only based on buzz or demand data. Use a checklist to keep the file easy to use.
