Eyeing an IPO? #5 Things To Keep In Mind Before Subscribing Before subscribing to any company IPO, an investor should know its business in and out, using the Red Herring Prospectus, which is the primary source of information

It is raining IPOs in the Indian capital market. In the past few weeks, the markets witnessed IPOs being issued from firms like Reliance Nippon Assets Management Company, Mahindra Logistics, New India Assurance and Khadim.

In the coming weeks, investors will be spoilt for choices to subscribe IPO of companies like HDFC Standard Life Insurance and Hindustan Aeronautics among others.

But, not to forget, so many options will also create a lot of confusion — the most prominent being which IPO should you subscribe to?

To help you take a call, Entrepreneur India spoke to some capital market experts about the details one should look into before subscribing an IPO.

Know the Company

Before subscribing to any company IPO, an investor should know its business in and out, using the Red Herring Prospectus (RHP) — a document submitted by a company (issuer) as part of a public offering of securities. It is the primary source of information.

Ideally, an investor should understand the sector in which the company is operating, the nature of its business (whether its import or export business).

One should also take care if the international or domestic market will impact the business, said Pankaj Karde, Head (Institution Sales and SalesTrading) of Systematix Shares.

Look for a few important details in understanding the unique proposition that has helped the company scale up its operations. Find out the entry barriers in entering or running the same business. Is the business scalable? What percentage of market share would the company be able to garner with the additional capital that the company is raising?

Additionally, Prasanth Prabhakaran, Senior President & CEO of YES Securities (India) advised to start by paying special attention to the management team or promoters running the business to understand whether they have impeccable integrity and track record of scaling up and building long-term businesses.

"Analyze the financials that the company has declared and all the key financial ratios – P/E ratio, debt to equity ratio and operating profit margin —to understand the health of the issuer," added Prabhakaran.

Peer Comparison

Investors tend to compare the performance of the to-be-listed entity with similar companies, who are already public. However, it is essential to remember that many a times an IPO involves a company that might have no good reference points. "No two companies are the same and hence it is essential to get in-depth knowledge of the IPO before one invests," he pointed out.

However, if you are still looking to compare and you don't find a domestic peer, look for an international company that operates in the same domain, Karde suggested.

Where is Your Money Going

While referring to RHP, also try to understand how the company plans to utilize the funds.

"With a lot of these upcoming IPOs, especially in the SMEs segment while some companies are looking to raising funds to give an exit to private investors, others want it for business expansion. You have to take a call whether you want to be part of the company growth story or give exits to PE," added Karde.

Who is the Underwriter

Special attention should be paid to the quality of the underwriters, the investment bank assisting the company with the IPO, and the specifics of the deal, Prabhakaran highlighted.

"Successful IPOs are typically supported by bigger brokerages that have the ability to promote a new issue if required. Be more wary of small investment banks because they may be willing to underwrite any company," he added.

Demand

Lastly, after the issue opens for subscription, Prabhakaran said investors should keep a track of the demand the issue has generated in all segments – Institutional, Retail, HNI etc. This gives subscribers a fair indicator on how the market perceives the IPO and helps them understand the quality of the issue.