Things to know before applying IPO
Any company - small, medium or big - domestic or foreign - government, public or private operates in some or other risk environment. Risks may be internal or external, social or political or even economical. None of the company can operate in its comfort zone. There are always risks associated with each and every business.
When any company comes up with its IPO, a lot of buzz spreads, a lot of research happens on company and all lot of discussions take place whether to apply or not? Market Pundits and analysts give their valuable opinion on the IPO. Every IPO forum gets flooded with lot many news and perspectives about the IPO. Also, across the country grey market premium and kostak floats
Well, I must tell you it is a market and anything and everything can happen. Sometimes an overrated IPO gets miserably failed and underrated IPO rocks. This is the market and you can not imagine what is in store for any particular IPO? Sometimes, a big market pundits are also left with big question mark. In one night, Tata motors and Infosys shareholders can become poor out of rich. Crores of shareholders' worth can get wiped off in just a matter of six hours.
We talk about small investors. Many small investors read a lot of stuff about the IPO. They are very active in various IPO forums and read the reviews published by different agencies. They update themselves with subscription status and other relevant movements like list of anchor investors, etc. They remain updated about every minor thing. They keep eyes and ears open on pros and cons of applying particular IPO.
On the other hand, some small investors apply every IPO without any knowledge. They rush with the rally. They just believe that every IPO gives lucrative listing gain. Some investors have no idea about the nature of business of the IPO company. They have no clue about the company and its promoters background, the risks associated with the operations of the company, profitability of last few years, etc. Due to lack of knowledge and rushing with the rally, sometimes they get trapped. Their hard earned money gets blocked or gets wiped off due to poor listing. For a small investor, Rs. 5000 listing gain is joy. The same way, Rs. 5000 loss makes the equal opposite effect. Later they clutch their heads in desperation.
To avoid such situation, what small investor should do? Six primary things every investor must know before applying the IPO
1. Verification of RoNW (Return on net worth), Profit after Tax, Fixed Assets figures
Primarily, you should know some figures from the restated financials of the company namely;
Return on net worth : RoNW is benchmark to measure the profit earning capacity of net worth of the company. Higher the percentage, company's profit earning capacity is good. For example, if a company has earned 250 Crore profit after tax and company has net worth of Rs 1000 Crore. Then, RoNW is 25%. So, the company has good profitability standard.
RoNW = Profit After Tax/Net Worth
Net worth = Share capital + Reserves & Surplus
An investor should check the trend of RoNW percentage.
Profit after tax : Company's profit after deduction of all expenses and tax. If company is loss making, you should think twice before applying. Also, company was loss making and suddenly made profit just before IPO, then an investor should think thrice before applying. It can be gauged that such profit may be fictitious. They might have cooked accounts to give a good picture.
Fixed assets : Fixed Assets are the bases of any company. Fixed assets are the main resource of revenue generations for the company. However, this principle doesn't apply in service industry.
2. EPS and PE Multiple.
EPS (Earning Per Share) is the ability of one share of company to earn profit. How much money your share can earn is derived by profit after tax decided by number of shares
EPS = Profit After Tax / Number of shares
PE Multiple is the indicator of share price how much multi fold of its EPS. The more is the PE Multiple, share is overpriced and vice versa. PE Multiple of company may range from 10 to 100 or even more. An investor has to take other factors into consideration before applying.
3. The objective of IPO
Any company wants to issue shares have to provide the objective of the proceeds received from the IPO.
There may be two types of arrangement to garner money from the public.
Offer for sale : In this arrangement, existing shareholders sell their shares to exit. Company doesn't receive any proceeds in such arrangement. Public applies the shares because company is very established and having brand name in its industry.
Fresh issue : In this arrangement, company receives the proceeds. Company will utilise the money for some or other purpose. They will specifically mention the end use of money raised through IPO. There may be various reasons namely;
A. For expansion of current operations of the company. In this case, company may have taken up some projects to multi fold its current operations. Here, in long run company's span of operations increases and ultimately reflects in value appreciation of shares
B. For repaying debt. In this case, company may repay the current debts and reduces its interest cost. By reducing debt, company's profitability may increase as interest cost marginally reduces. Here, company will not make any additional profit, only interest cost will reduce.
C. For working capital requirements. This is the bad sign. In this case, prima facie, company is running out of cash for its daily working capital requirements. It is painful but when management bring IPO for working capital requirements. There may be some mismanagement of cash.
D. For other general corporate purposes. In this case, company uses money to buy some fixed assets, brand building and other marketing efforts, meeting expenses towards any strategic initiatives, partnerships, tie - ups, joint ventures, acquisition etc. These objectives may increase the profitability of the company.
These are the various reasons company would give in its Red Herring Prospectus submitted to SEBI.
An investor should at least gain the knowledge of end use of money.
4. Background of the company, it's promoters and present management team
Every company's success is highly dependent on the quality of its management. An investor needs to gain insight into the background. When the company was formed? Who were the promoters? What are the lines of businesses? Since how many years company is into this business? How was the percentage of growth so far etc. These parameters will give you the company's history and emergence. Also, you need to understand the back ground of company promoters and present management team to understand their strength.
5. Any pending litigation against company or its promoters
This point is very important for investors to know. In big company, small cases by or against the company are always going on, it is not a big deal to have pending cases. However, if there are any pending litigations against the company or its promotors which can badly affect the operations of the company, then it is imperative to not to ignore completely.
Many times, it may happen that company's promotors/directors face criminal or civil proceedings against them. Such things are black spot on the character of the company or its directors and sooner or later can adversely affect the company.
There many be copyright related cases against the company. Such cases in future may lead to withdrawal of brand from the company or huge copyright infringement penalty
6. The dynamics of the industry :
Without forgetting, you should gain the knowledge of surrounding risks to the company. For example, paper back book publisher company has the risk of digitalisation. Number of people reading books online may impact their business. Local cable operating company may have the risk of bigger DTH companies. DTH companies give more channels with reasonable cost and good services. This can impact the business. So you have to look into the risks of company.
Thank you for reading...Jai Hind
For more market related update, please subscribe my blog
My other articles:
We talk about small investors. Many small investors read a lot of stuff about the IPO. They are very active in various IPO forums and read the reviews published by different agencies. They update themselves with subscription status and other relevant movements like list of anchor investors, etc. They remain updated about every minor thing. They keep eyes and ears open on pros and cons of applying particular IPO.
On the other hand, some small investors apply every IPO without any knowledge. They rush with the rally. They just believe that every IPO gives lucrative listing gain. Some investors have no idea about the nature of business of the IPO company. They have no clue about the company and its promoters background, the risks associated with the operations of the company, profitability of last few years, etc. Due to lack of knowledge and rushing with the rally, sometimes they get trapped. Their hard earned money gets blocked or gets wiped off due to poor listing. For a small investor, Rs. 5000 listing gain is joy. The same way, Rs. 5000 loss makes the equal opposite effect. Later they clutch their heads in desperation.
To avoid such situation, what small investor should do? Six primary things every investor must know before applying the IPO
1. Verification of RoNW (Return on net worth), Profit after Tax, Fixed Assets figures
Primarily, you should know some figures from the restated financials of the company namely;
Return on net worth : RoNW is benchmark to measure the profit earning capacity of net worth of the company. Higher the percentage, company's profit earning capacity is good. For example, if a company has earned 250 Crore profit after tax and company has net worth of Rs 1000 Crore. Then, RoNW is 25%. So, the company has good profitability standard.
RoNW = Profit After Tax/Net Worth
Net worth = Share capital + Reserves & Surplus
An investor should check the trend of RoNW percentage.
Profit after tax : Company's profit after deduction of all expenses and tax. If company is loss making, you should think twice before applying. Also, company was loss making and suddenly made profit just before IPO, then an investor should think thrice before applying. It can be gauged that such profit may be fictitious. They might have cooked accounts to give a good picture.
Fixed assets : Fixed Assets are the bases of any company. Fixed assets are the main resource of revenue generations for the company. However, this principle doesn't apply in service industry.
2. EPS and PE Multiple.
EPS (Earning Per Share) is the ability of one share of company to earn profit. How much money your share can earn is derived by profit after tax decided by number of shares
EPS = Profit After Tax / Number of shares
PE Multiple is the indicator of share price how much multi fold of its EPS. The more is the PE Multiple, share is overpriced and vice versa. PE Multiple of company may range from 10 to 100 or even more. An investor has to take other factors into consideration before applying.
3. The objective of IPO
Any company wants to issue shares have to provide the objective of the proceeds received from the IPO.
There may be two types of arrangement to garner money from the public.
Offer for sale : In this arrangement, existing shareholders sell their shares to exit. Company doesn't receive any proceeds in such arrangement. Public applies the shares because company is very established and having brand name in its industry.
Fresh issue : In this arrangement, company receives the proceeds. Company will utilise the money for some or other purpose. They will specifically mention the end use of money raised through IPO. There may be various reasons namely;
A. For expansion of current operations of the company. In this case, company may have taken up some projects to multi fold its current operations. Here, in long run company's span of operations increases and ultimately reflects in value appreciation of shares
B. For repaying debt. In this case, company may repay the current debts and reduces its interest cost. By reducing debt, company's profitability may increase as interest cost marginally reduces. Here, company will not make any additional profit, only interest cost will reduce.
C. For working capital requirements. This is the bad sign. In this case, prima facie, company is running out of cash for its daily working capital requirements. It is painful but when management bring IPO for working capital requirements. There may be some mismanagement of cash.
D. For other general corporate purposes. In this case, company uses money to buy some fixed assets, brand building and other marketing efforts, meeting expenses towards any strategic initiatives, partnerships, tie - ups, joint ventures, acquisition etc. These objectives may increase the profitability of the company.
These are the various reasons company would give in its Red Herring Prospectus submitted to SEBI.
An investor should at least gain the knowledge of end use of money.
4. Background of the company, it's promoters and present management team
Every company's success is highly dependent on the quality of its management. An investor needs to gain insight into the background. When the company was formed? Who were the promoters? What are the lines of businesses? Since how many years company is into this business? How was the percentage of growth so far etc. These parameters will give you the company's history and emergence. Also, you need to understand the back ground of company promoters and present management team to understand their strength.
5. Any pending litigation against company or its promoters
This point is very important for investors to know. In big company, small cases by or against the company are always going on, it is not a big deal to have pending cases. However, if there are any pending litigations against the company or its promotors which can badly affect the operations of the company, then it is imperative to not to ignore completely.
Many times, it may happen that company's promotors/directors face criminal or civil proceedings against them. Such things are black spot on the character of the company or its directors and sooner or later can adversely affect the company.
There many be copyright related cases against the company. Such cases in future may lead to withdrawal of brand from the company or huge copyright infringement penalty
6. The dynamics of the industry :
Without forgetting, you should gain the knowledge of surrounding risks to the company. For example, paper back book publisher company has the risk of digitalisation. Number of people reading books online may impact their business. Local cable operating company may have the risk of bigger DTH companies. DTH companies give more channels with reasonable cost and good services. This can impact the business. So you have to look into the risks of company.
Thank you for reading...Jai Hind
For more market related update, please subscribe my blog
My other articles:
(Note : Above indicative list is prepared based on my knowledge and understanding of market. There may be other parameters. You should do your own research before applying)
Nice Article.
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Thank you...:)
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