Before you subscribe to an IPO, pay attention to these red signals.

In 2021, India’s IPO fever has seized the stock market by storm. Companies are swarming the market, hoping to generate money through initial public offerings. This year has been exceptionally noteworthy since we’ve seen the launch of new-age digital businesses like Zomato, Paytm, Nykaa, and others. While some succeeded, others, despite the hoopla, failed to do well in the market. This year, 53 IPOs (including 1 REIT and 1 INVIT) raised a total of Rs 1,14,653 crore in 11 busy months in the IPO market. In the near future, enterprises ranging from new-age startups to well-established brands will line up in the IPO market. Companies like Adani Wilmar, Keventer Agro, LIC, PharmEasy, and Go Airlines, among others, will go public in the near future.

Given the popularity of initial public offerings (IPOs) among retail investors, it’s critical to understand the red and green flags to look for before investing in one. Investors, particularly those in Generation Z and millennials, must understand that just because a company’s name is well-known in the market does not indicate it is a good investment. There are various elements that might determine whether or not a firm is worthy of investment. When it comes to investing in the stock market, there is no need to succumb to FOMO (fear of missing out).

Also Read:- How Shares Are Allotted In IPO In Hindi?

Instead, you may conduct your research on the organisation based on the following criteria and keep the following red signs in mind:

Business plan

As part of your study, you should examine a company’s business strategy before deciding to participate in its IPO. The investor must comprehend the company’s revenue generation and expense structure. The company’s main strategy for doing business profitably and its competitive edge in the market must be considered. You must also be familiar with the company’s goods and services. Pricing and expenses are two more levers. If the company’s business strategy appears to be sound, you should continue your study to learn more about it.

Financial performance in the past

The previous financial performance of a company is the next crucial point to consider when deciding whether or not to invest in it. You must determine whether the firm has been profitable for the past five to six years and whether its sales have increased. Profits and expansion suggest that the business is in good shape. As a result, if you purchase an IPO of that firm, you will be able to profit as well. However, imagine the company’s profit and growth have been erratic during the last five years. In that situation, investing in it isn’t a good idea since the data are inconsistent, and you can’t depend on inconsistent numbers to predict profitability.

Also Read:- How To Find A Good IPO & When To Invest In It ?

Management

You might wish to look at its management once you’ve looked at its business model and track record. Examine the persons in charge of the firm, including the promoters and the management team. You’ll have to determine whether or not these individuals have the necessary experience to operate the company. It’s also crucial to determine whether the firm is trustworthy and whether it has a history of frauds or legal challenges.

Valuation

After you’ve looked through the company’s business model, history, and management, it’s time to look at its value. There are several valuation methodologies available, including Price to Earnings (PE), Enterprise Value-to-Sales (EV/Sales), and Price to Value. It aids in comparing the company’s worth to that of its competitors. For example, if the average PE of an FMCG firm is 45X, and the company going public is asking for 50 PE, the investor has no gain. If the PE is 40, the investor has room to develop and earn. However, in addition to value, we must also observe growth. The growth factor is also used to determine value.

Also Read:- How To Apply For An IPO As An HNI Investor With Paytm Money

Conclusion

Investing in initial public offerings (IPOs) may be risky, and if investors aren’t careful, following a trend can lead to losses. Because India’s retail investors are young and inexperienced in the capital market, they must grasp what it means to invest in an initial public offering (IPO). An investor may make money in the stock market by doing a little homework.

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