IPO Review and Analysis
Industry Structure – Understanding industry structures and landscapes is very important. An industry faced with headwinds doesn’t bode well for its players. And it doesn’t necessarily matter if a constituent company is a strong or weak player. For example, an airline company’s IPO at a time of high oil prices is a strict no, unless there is comfort in valuations.
Management Analysis – A management with high integrity and deep understanding of the business is a boon to investors. Every industry and business is faced with headwinds, albeit at different times and in varying multitudes. In such instances, management integrity or the absence of it can be seen clearly and the market also rewards companies whose management puts shareholders’ interest ahead of everything else.
Also, checking for anomalies regarding excessive compensation, related party transactions, capital allocation etc could be rewarding. In the past, we have seen number of company management engaged in funds diversion through related party transactions and most of the times, it has not been good for investors.
Financial Performance – In IPO reviews, past financial performance can be a good indicator of what is in the store for investors. As such, it is important to keep an eye on past track record and observe the strategies employed by the management to navigate hardships. A business with a clear trend of declining revenues and profitability is unlikely to reward shareholders in the long term.
Valuations – This is inarguably the most important criterion in our IPO analysis. Even if everything is right, things can go awry when it comes to valuations. A good business purchased at expensive valuations may turn out to be inferior to a mediocre business bought at compelling valuations.
Some valuation parameters such as RONW and NAV are already provided in prospectus, in line with SEBI guidelines. While these serve the purpose of getting the basics right, we make it a point to evaluate the business on other metrics such as ROCE, EBITDA, Price/Sales etc to get a more granular view.
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Disclaimer – The analysis and information provided in these pages is purely for education purposes and represent personal views of writers. This should not be construed as investment advice. Please consult your investment advisor before investing in the IPO.