In 2020, 43 Initial Public Offer (IPOs) were launched in the Indian stock markets. Globally, India has the ninth rank as per the report. This indicates a strong momentum in the IPO market. Companies take advantage of the financial market to raise fresh funds.
Due to the high volatility and high retail market participation, private companies offload their equity shares into the financial market to become publicly listed companies. Once the company gets listed, the bidding war begins. Buyers and sellers bid against each other, and due to the basics of demand and supply, the price of the asset fluctuates.
Valuation analysis in an entity’s lifespan is important. We will discuss the necessary evaluation points you should know, but before going ahead let us answer the most frequently ask question among newcomers, that is; “how to invest in an IPO?”
“How To Invest In An IPO?”
You need to have a Demat account to apply for an IPO. However, to sell the allot shares you will need a trading account too. A trading account is the first essential step without which it is not possible to sell shares in the secondary market.
Here are some of the steps you need to follow to invest in an IPO:
- Once you log in to the trading portal, you will see an “Open IPO” tab. You have to click on the icon.
- Then, you will redirect to another webpage. The webpage consists of an application form submit before the application date closes.
- After you have completed the steps, you’ll redirect to the payment gateway. Where you will have to choose different options. You can pay directly via net banking, from debit card or credit card, or you can choose to pay via UPI as well.
It blocks an ASBA account with your banking partner when the amount deduct from your bank account. Post allotment, of shares the money, is debit from your bank account, and the allotted shares are credited back into your demat account.
How to choose upcoming IPOs for worth investing in
In 2021, a sharp rally in all indices has supported IPOs’ performance. Equity markets flood with initial public offerings (IPOs) with the economic recovery since last year that make investors overwhelmed to choose the best IPO.
We are expecting the PharmEasy IPO in October. Among upcoming IPOs are Paytm, Nykaa, Bajaj Energy. Your investment can be safe if you will be aware of important aspects of IPOs. Following is the evaluation criteria that help you to identify an excellent IPO investment:
-
Management Quality
Before you invest in an IPO, it will be helpful to analyze the company’s financials of at least the previous three years and look at the quality and stability of the management.
-
A good peer review
You can compare other listed companies in the industry to know the growth prospects and relevancy of the P/E ratio of the company. It will help you to find out overvalued shares.
-
The risk involved in an IPO
If you do not research well, an IPO can be a risky investment. Refer to the Red Herring Prospectus closely to know the higher disclosure of the IPO is available.
-
Private equity and venture capital
Do not overlook the existing institutional investors in the company. It will let you know if an IPO is considered profitable by institutional investors.
Thus, to find an upcoming IPO worth investing consider these aspects and make a prudent decision, at least research on these aspects.
Valuation Analysis
The price of any financial instrument depends on the basic concept of demand and supply. Getting to the right value before the market launch is a difficult task. There is no perfect alchemy for this however, analysts and investment bankers try various methods to come to the right valuation of the company.
The most commonly used pricing methods are:
- Absolute Valuation
- Relative Valuation
Absolute Valuation
Under this, the Discounted Cash Flow (DCF) valuation method is used to value the company. In the case of DCF, you can assume the profitability on future assumptions and then those are discount. After discounting, the value that we get is the current value or the intrinsic value of the company based on which the share price is determined.
Relative Valuation
Under this method, the valuation of a company is calculation based on the valuations of peer companies. Values of similar companies are taken into consideration to bring out the current valuation of the IPO company.
The comparison is done based on the peer’s sales, revenue, and market capitalization figures. Sometimes, it becomes difficult to calculate the intrinsic value based on one valuation method. Then it is important to use both valuation methods.
Conclusion
It is important to know the valuation techniques used to calculate the right value of the stock price. Similarly, it is important to know about margin trading facilities provided by SEBI registered brokers. Both of these concepts are very important for a retail investor.
