How to analyse whether a new IPO will succeed or not while going forward?

In this module, you will learn how to analyse ipo stock. Initial Public Offering (IPO) is the process by which companies can go public by issuing new shares for the first time or existing shareholders sell part of their shareholding for the first time to the public.

Analyzing any listed companies and IPOs has quite the same approach. When analyzing a company, whether it's public or private, investors typically read annual reports, investor presentations, concall etc. But, when analyzing IPOs, investors face the slight challenge of limited historical data. They have only Draft Red Herring Prospectus (DRHP).

The Draft Red Herring Prospectus (DRHP) is an initial document filed with regulatory bodies by a company intending to launch an Initial Public Offering (IPO) or a public issue. It contains essential information about the company's business, operations, financial performance, and prospects.

How to Analyze an IPO

There are some factors that can impact an IPO. But before analyzing an IPO, investors should take into consideration DRPH. Let's explore how to evaluate an IPO with a case study of PAYTM (One97 Communications Ltd).

Company Background: The most important factor is to understand the business model, industry, products/services, target market, competitors, and any unique selling propositions (USPs). At that time, PAYTM had an asset-light model and earned its revenue from two innovative business models: Commerce and Cloud Services and Financial Services. As of 30 June 2021, they offered their services to 33.7 crore consumers and over 2.2 crore merchants registered with them
Sector Outlook: The sector outlook provides insights into the broader industry dynamics, including growth prospects, market trends, and regulatory factors. At that time, technology was transforming the digital scene in India, making it more accessible to both merchants and customers. The Digital India program aims to increase digital literacy, online government services, and strong digital infrastructure. Digital payments soared, reaching a market value of $20 trillion in FY21, driven by 43 billion transactions.
Objective of the IPO: When considering an IPO, it's crucial to understand its purpose. In Paytm's case, they aimed to raise Rs.18,300 crores. Of this, Rs.10,000 crores were allotted to existing investors cashing out their stake, while the remaining Rs.8300 crores were used for various purposes including marketing and promotions, customer acquisition, expanding merchant base, improving technology, and investing in new business initiatives, acquisitions, and strategic partnerships.
Risk Factors: Sector-specific risks, such as regulatory changes, industry turmoil, and cyclical downturns, can all have an impact on an IPO's prospects. In 2021, PAYTM faces challenges with net losses, increasing operating expenses, tax litigations, reliance on third-party services, negative cash flows, regulatory uncertainties, lack of dividends, rising payment processing charges, and potential harm from technology infrastructure issues.
Company’s Financial: The most crucial factor to consider when deciding whether or not to invest in an IPO is the company's financial health. At the time of the Paytm IPO, revenue from operations fell 14.6% between FY20 and FY21, but other income surged by 48.07%. Despite this, earnings increased significantly, with Rs.363 crore in FY21 compared to a loss of Rs.238 crore in FY2020.
Market Sentiments: To understand market sentiment, investors should also know its GMP (Grey Market Price). It is a premium amount paid at which initial public offering (IPO) shares are traded before they are listed on the stock exchanges. The last GMP for Paytm IPO was ₹-30. So, the expected IPO listing price as per the grey market was ₹2120, listed below the GMP price and marked as a negative listing for GMP.
Demand for the Public Issue: For any IPO, it’s important for investors to know how many investors have applied. In the case of PAYTM, it was oversubscribed 1.89 times.
Future Prospects: One of the most important factors while analyzing an IPO is the company’s plans. You should ensure that the company’s future growth prospects should be sound. At that time, the Indian FinTech industry's market size is $50 Bn in 2021 and is estimated at ~$150 Bn by 2025.
Now that you understand how to analyze an IPO, explore the upcoming IPOs that are available for subscription to determine whether they are profitable. Check out the IPO section on StockEdge.