What to look out for if you are investing in an IPO

Initial public offers are a risky investment route; the investor has no control over the price at which he buys the stock

Until a few years ago, initial public offers (IPOs) of companies created quite a lot of excitement and enthusiasm among investors. IPOs carried the promise of making investors a whole lot richer overnight, enticing them to take the plunge regardless of the fundamentals or valuations. Moneylife has always been sceptical of going for IPOs, maintaining that it is a riskier investment route.

This is simply because you have no control over what price you buy the stock at. Remember that promoters' interests are exactly opposite of yours. You want a cheaply priced IPO. The promoters want to sell it at as high a price as possible.
As it happened, many of these public offers suffered miserably, resulting in heavy losses. The result is that most retail investors today shy away from IPOs altogether. Retail subscriptions have dwindled and even employees don't want to put money in the companies they know inside out. Putting money into an IPO carries substantial risks but, if you must invest, extensive due diligence is critical. In fact, much more caution is advised in IPOs considering that most of them do not provide their financial history beyond what is mandated by the regulators. So, before putting in your hard-earned money in an IPO, do extra homework. What parameters should an investor consider while investing in an IPO?

Promoter Background: Check the reputation of the promoter and his previous ventures, if any. A foreign partner of repute backing the company is an advantage but Indian promoters are known to fix this as well. If there are too many litigations pending against any of the promoters, avoid the issue. Some of the really poor-quality IPOs shoot up after listing. Please do not regret. It is usually rigged and you have no way of knowing that. Another key aspect is to check the post-issue holding of the promoter. If it is too low, then you have reason to be circumspect.

Historical Performance: As with any other potential investment, evaluate the past performance (at least five years) of the company thoroughly - the rate of growth in earnings, profits, growth in market share, etc. Do not just go by the past one or two year's financials. These can be easily manipulated and distorted. They usually are, to make the issue look attractive.

Valuation: Do not look at the company's share price in isolation. Compare the price to earnings (P/E) multiple of the company with that of its peers (the lower the better). A higher P/E multiple is justified only if the growth prospects are visibly brighter. Most often, IPOs are priced too high. Remember, the company wants to sell its issue at as high a rate as possible.

Objects of Issue: Is the stake sale for financing new projects, undertaking expansion, making acquisitions, paying off existing debt or something else? While there is a lot of genuine hope around expansion or a new venture, they usually get delayed and the IPO money starts giving returns only later.

Risk Factors: Thanks to stringent disclosure norms, IPO prospectuses these days have a detailed listing of risk factors, internal and external, for the company. Reading these is a must and would be enough to put you off.



George Washington

6 years ago

Great Information!


6 years ago

Good tips. May I add a few points which I had read it on the net elsewhere ?

The company's balance sheet:

If you want to be an investor, it's time to start reading and understanding a balance sheet. Pay attention to the topline and the bottomline, major variances; but most importantly, consider carefully the extraordinary items and notes to accounts. It's quite possible for a company to derive its revenues not from its main business, but from smart accounting entries.

The company's balance sheet:

If you want to be an investor, it's time to start reading and understanding a balance sheet. Pay attention to the topline and the bottomline, major variances; but most importantly, consider carefully the extraordinary items and notes to accounts. It's quite possible for a company to derive its revenues not from its main business, but from smart accounting entries.

Compliance record and litigations:

Find out whether group companies have been diligent in filing their returns to various bodies such as the stock exchanges and registrar of companies. The prospectus will disclose all major litigation cases filed against the company's directors and promoters, as well as against group companies. Avoid companies that are deeply mired in litigations.



In Reply to Prakash 6 years ago

Oops. The second point is a repeat of first. The correct point is:

Shareholding pattern:

It is important to know who the major shareholders of the company are and what their shareholding pattern will be after the issue. A huge promoter stake is not too desirable.

If a company has institutional investors as its shareholders, it means that a lot of due diligence has already been done on the company. Try to find out at what prices these pre-issue allotments have been made, and to whom and when.

It is also important to look at what the possible shareholding pattern will be after the issue.

Record auto sales in August, growth to exceed forecast: SIAM

New Delhi: Domestic automobile sales continue to break record numbers with the Society of Indian Automobile Manufacturers (SIAM) today stating that the total vehicles sold in the country during August at 12,63,293 units was the highest ever achieved in a month, bettering the mark set in July this year reports PTI.

The industry had clocked total sales of 12,37,461 units in July this year. On the back of the continued robust growth, SIAM said auto sales will exceed the forecast it had made earlier this fiscal.

The overall vehicle sold in the domestic market during August grew by 25.24% from 10,08,712 units in the same month last year.

SIAM said the record number in August was driven by best ever monthly sales achieved in passenger cars, passenger vehicles, two-wheelers and multi-utility vehicles segments.

"The fundamentals of the economy continue to be strong and consumer confidence is high. These are driving the growth of sales of vehicles, mainly in the personal usage segments," SIAM director general Vishnu Mathur told reporters here.

According to SIAM, domestic passenger car sales jumped by 33.24% to 1,60,794 units in August compared to 1,20,681 units in the same month last year. The August sales was the best ever monthly sales, bettering the previous best of 1,58,764 units in July this year.

Similarly, motorcycle sales of 7,27,542 units, up 19.04% to from 6,11,168 units in the same month last year, was also a record. The previous highest of 7,25,311 units was achieved in May this year.

Total two-wheeler sales of 9,57,304 units in August, up 23.24% to from 7,76,772 units in the same month last year, was also a record. The previous best was in July this year at 9,38,514 units.

Sales of commercial vehicles jumped by 28.12% to 52,030 units from 40,609 units in the year-ago period.

Mr Mathur said with sales continuing to be robust, SIAM expects the industry to exceed its predictions made earlier this year.

SIAM had forecast that passenger vehicles sales to grow around 13% this fiscal, which is now witnessing a growth of around 30%.

"Similarly, utility vehicles are growing at around 17% as against a forecast of 14%," he said, adding the commercial vehicles segment is also growing at 24% as against a forecast of 19%-20% for 2010-11.

During August, the country's largest carmaker Maruti Suzuki India posted domestic sales of 78,351 units, up 24.31% from the same month last year, SIAM said.

Hyundai Motor India had sales of 28,601 units, up 17.21% from August last year. Tata Motors had sales of 22,312 units, up 51.21% from the year ago period.

In the motorcycles segment, market leader Hero Honda witnessed a marginal decline at 3,86,574 units from 3,89,814 units in the same month last year.

Rival Bajaj Auto on the other hand, gained handsomely at 2,09,567 units, up 72.27% from the same month last year. TVS Motor Co had sales of 49,630 units, up 22.51% from the same month last year.

According to the SIAM data, scooters segment grew by 43.63% at 1,70,482 units during August. The growth was led by Honda Motorcycle and Scooter India with sales of 74,405 units, up 27.72% from the year-ago period.

Hero Honda's scooter sales were at 26,588 units, up 43.63%, while that of TVS Motor Company were at 39,171 units, up 41.53% from August last year.

Mr Mathur said despite marginal increase on interest, sales are expected to continue to be robust.

"Slight marginal increase in interest rates are only disruptive, it is not going to hamper growth," he said, however, adding with the base effect showing a decline there could be a moderation of growth rate.

He said already the commercial vehicles segment is witnessing a moderation in sales growth after hitting a peak in March this year with the highest ever monthly sales of 67,362 units.

During August, the three-wheeler segment registered sales of 49,732 units as against 39,207 units in the same month last year, up 26.84%, SIAM said.


Prakash Industries: A clarification

On 3rd September, here is what we said in the report regarding steelmaker Prakash Industries, citing research from reputed institutional brokers such as Edelweiss: The company has a 100MW captive power unit. Prakash is also setting up a 625MW power plant. It has been operating a coal mine in Chotia, Chhattisgarh, since 2006. The mine has B grade reserves of about 50 million tonnes (MT) with current extraction of about 1 mtpa.

We did not have any notion of any wrongdoing in this respect. We also reiterate that we have not recommended the stock in any way in this article. The purpose of the article was to throw some light on an otherwise not widely-tracked stock, citing available research.

Here is the clarification put out by Prakash Industries, reproduced verbatim: "The extraction of coal, its quantity, grade and usage are being verified every year by the Office of the Coal Controller, Government of India, State Mining Department and other Government agencies from time to time. After meeting out the coal requirements of Sponge Iron Plant the left out middlings are being used for captive power plant requirements. Company has to buy coal through E-Auction to meet with its requirement for additional expansion in Sponge Iron Plant."



Shibaji Dash

6 years ago

It's heartening indeed the company volunteers such unflattering but true information about itself.Captive power plants may or may not be able to generate quality power. It appears to have become a habit with many journos/analysts to report an enterprise having set up or about to set up a captive power plant for the info of investors without touching upon the likely profit earning capacity of the captive power plant.A CPP can not be equated with an IPP. The company in this case therefore is an exemplar in the given context.

We are listening!

Solve the equation and enter in the Captcha field.

To continue

Sign Up or Sign In


To continue

Sign Up or Sign In



The Scam
24 Year Of The Scam: The Perennial Bestseller, reads like a Thriller!
Moneylife Magazine
Fiercely independent and pro-consumer information on personal finance
Stockletters in 3 Flavours
Outstanding research that beats mutual funds year after year
MAS: Complete Online Financial Advisory
(Includes Moneylife Magazine and Lion Stockletter)