{"id":4381,"date":"2021-09-06T16:58:59","date_gmt":"2021-09-06T11:28:59","guid":{"rendered":"https:\/\/www.tickertape.in\/blog\/?p=4381"},"modified":"2021-09-13T18:37:31","modified_gmt":"2021-09-13T13:07:31","slug":"5-parameters-to-analyse-an-ipo","status":"publish","type":"post","link":"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/","title":{"rendered":"Don\u2019t Ignore These 5 Parameters When Analysing an IPO"},"content":{"rendered":"\n<p>2021 has been the year of IPOs. At the end of 8 mth of the calendar year 2021, 36 companies have hit the market with a total issue size of around Rs. 50,000 cr. The response from the investor community &#8211; retail, HNI, and institutional alike has been extraordinary. This has resulted in record over subscriptions resulting in listing gains that are double-digit or even triple-digit percentage in some cases. However, it is very important to also consider the fact that only 23% of the IPOs listed in 2007 have posted positive returns to date and 7% outperformed the broader <a href=\"https:\/\/www.tickertape.in\/indices\/nifty-index-.NSEI?utm_source=blog&amp;utm_medium=article\" target=\"_blank\" rel=\"noreferrer noopener\">Nifty50<\/a> <a href=\"https:\/\/www.tickertape.in\/blog\/stock-market-index\/\">index<\/a>.<\/p>\n\n\n\n<div id=\"ez-toc-container\" class=\"ez-toc-v2_0_66_1 counter-hierarchy ez-toc-counter ez-toc-custom ez-toc-container-direction\">\n<div class=\"ez-toc-title-container\">\n<p class=\"ez-toc-title \" >Table of Contents<\/p>\n<span class=\"ez-toc-title-toggle\"><\/span><\/div>\n<nav><ul class='ez-toc-list ez-toc-list-level-1 ' ><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-1\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Well-what-is-an-IPO\" title=\"Well, what is an IPO?\">Well, what is an IPO?<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-2'><a class=\"ez-toc-link ez-toc-heading-2\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Important-parameters-to-evaluate-an-IPO\" title=\"Important parameters to evaluate an IPO\">Important parameters to evaluate an IPO<\/a><ul class='ez-toc-list-level-3' ><li class='ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-3\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Total-Addressable-Market-TAM\" title=\"Total Addressable Market (TAM)\">Total Addressable Market (TAM)<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-4\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Team\" title=\"Team\">Team<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-5\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Market-share\" title=\"Market share\">Market share<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-6\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Valuation\" title=\"Valuation\">Valuation<\/a><\/li><li class='ez-toc-page-1 ez-toc-heading-level-3'><a class=\"ez-toc-link ez-toc-heading-7\" href=\"https:\/\/www.tickertape.in\/blog\/5-parameters-to-analyse-an-ipo\/#Risks\" title=\"Risks\">Risks<\/a><\/li><\/ul><\/li><\/ul><\/nav><\/div>\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Well-what-is-an-IPO\"><\/span><strong>Well, what is an IPO?<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>An <a href=\"https:\/\/www.tickertape.in\/blog\/ipo-investment\/\">IPO<\/a> \u2013 <a href=\"https:\/\/blog.tickertape.in\/all-you-need-to-know-about-ipos\/?utm_source=blog&amp;utm_medium=article\" rel=\"nofollow noopener\" target=\"_blank\">Initial Public Offering<\/a> is a process when a company goes from private to public. It offers its shares at a value mutually arrived at by the company, its advisors, and bankers. These shares eventually get listed on stock exchanges and are available for everyone to <a href=\"https:\/\/www.tickertape.in\/blog\/why-should-you-prioritise-investing\/\">invest<\/a> and\/or trade. The process of investing in an IPO is very simple. An investor needs to have a <a href=\"https:\/\/www.tickertape.in\/blog\/how-to-transfer-shares-from-one-demat-account-to-another-complete-process\/?utm_source=blog&amp;utm_medium=article\">Demat<\/a> and a <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-a-trading-account\/\">trading account<\/a>. They apply to the IPO via a bid placed through their broker. Only if you are lucky, will you get an allotment.<\/p>\n\n\n\n<h2 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Important-parameters-to-evaluate-an-IPO\"><\/span><strong>Important parameters to evaluate an IPO<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h2>\n\n\n\n<p>Some of the very recent IPOs remind me of a quote by his holiness the Dalai Lama. He said, \u201cSometimes not getting what you want is a wonderful stroke of luck!\u201d. A couple of recent IPOs were listed at a discount to their issue price. This shows that not every IPO makes money. Therefore, it is extremely important to understand and evaluate the companies in great detail. We at Piper Serica, give tremendous importance to the following 5 areas while evaluating IPOs.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Total-Addressable-Market-TAM\"><\/span><strong>Total Addressable Market (TAM)<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>This serves as the most important metric to understand a business and gauge its growth potential. The magnitude of the opportunity, the company\u2019s penetration, and the ability to capture a large market will eventually decide its growth and <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-shareholders-equity-overview-components-and-how-to-calculate\/?utm_source=blog&amp;utm_medium=article\">shareholder<\/a> returns.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Team\"><\/span><strong>Team<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>It is very important to critically evaluate the team that runs the company. We closely look at the background of the founders, promoters, and key people of the company. Experience of the team helps an investor decide how well would the company compete, grow, deal with problems, innovate and keep the customer as well as shareholder first approach intact. Along with the team, it is also important to evaluate the company\u2019s culture. These parameters eventually feed into the company\u2019s ability to attract talent, which is the biggest enabler of future growth.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Market-share\"><\/span><strong>Market share<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>Connected to TAM, knowing the company\u2019s current market share and its strengths to capture a greater share is paramount. Here, in our thinking, it is better to go with the leaders than the challengers. A leader has already demonstrated its ability to acquire a higher market share while for a challenger, there is a high risk of slow growth, poor profitability, and the ability to invest in innovation to stay relevant. In case of new-age digitech companies that are coming up for listing, it is important to give credit to the founding team that has stayed together and has survived a high mortality rate that can be as high as 90% in case of start-ups.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Valuation\"><\/span><strong>Valuation<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>With scores of new-age internet companies getting listed, we have realized that there is a need to tweak some of the traditional valuation techniques that are proving inadequate to value these fast-growth companies. While we use the discounted cash flows, valuing companies with a very high terminal value, low cost of capital, volatile cash flows, dynamic capital allocation strategies and capital raising plans is challenging. Similarly, short-form valuation tools like P\/E, PE\/G and P\/BV are handicapped because of low return on capital ratios for these high growth companies, long investment phase, and negative unit-level economics.<\/p>\n\n\n\n<p>Therefore, one needs to have the long-term mindset of a private <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-equity\/\">equity<\/a> investor to value these companies. The valuation exercise is to estimate rather than establish a <a href=\"https:\/\/www.tickertape.in\/blog\/what-is-the-intrinsic-value-of-a-stock-and-how-to-calculate-it\/?utm_source=blog&amp;utm_medium=article\">fair value<\/a>. One needs to build in assumptions that reflect the large addressable market, the quality of the founding team that has survived high mortality, the ability to raise capital to support growth and most importantly, a leadership position in a very high growth industry.<\/p>\n\n\n\n<h3 class=\"wp-block-heading\"><span class=\"ez-toc-section\" id=\"Risks\"><\/span><strong>Risks<\/strong><span class=\"ez-toc-section-end\"><\/span><\/h3>\n\n\n\n<p>While deciding which <a href=\"https:\/\/blog.tickertape.in\/all-you-need-to-know-about-ipos\/?utm_source=blog&amp;utm_medium=article\" rel=\"nofollow noopener\" target=\"_blank\">IPO<\/a> should one invest in, knowing the risks that the industry and the company faces is as important as any of the above parameters. The company\u2019s red herring prospectus (RHP) serves as a good tool since it lists all potential risks that it could face. However, the investor should also research various business, regulatory, technology and financial risks that the industry faces. Knowing the risks will eventually help the investors decide on the allocation of a particular company to the portfolio.<\/p>\n\n\n\n<p>In the end, it is very important for an investor to understand that investing requires one very important psychological trait \u2013 patience. You might do all the hard work, research, analyse, apply and get an IPO allocation. But if you exit early just because of good listing gains, you give up on a potential multi-bagger. Let your stocks talk by their operating results \u2013 not by their daily or even yearly price quotations \u2013 whether the investment is successful.<\/p>\n\n\n\n<p>The market may ignore business success for a while but eventually will confirm it. As Ben Graham said, \u201cIn the short run, the market is a voting machine but in the long run it is a weighing machine.\u201d The speed at which the earnings grow is more important than the speed at which the price grows. In fact, delayed recognition can be an advantage: it may give a chance to buy more of a good thing at a bargain price.<\/p>\n\n\n\n<p><em>Check out <a href=\"https:\/\/piperserica.smallcase.com\/?utm_source=blog&amp;utm_medium=guestarticle&amp;utm_campaign=ajaymodi\" target=\"_blank\" rel=\"noreferrer noopener nofollow\">smallcases manged by Piper Serica<\/a>, where the author is VP.<\/em><\/p>\n","protected":false},"excerpt":{"rendered":"<p>Only 23% of the IPOs listed in 2007 have posted positive returns to date and 7% outperformed the broader Nifty50 index. Look at these 5 parameters when analysing an IPO.<\/p>\n","protected":false},"author":56,"featured_media":4385,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"inline_featured_image":false,"_lmt_disableupdate":"","_lmt_disable":"","footnotes":""},"categories":[9,1727],"tags":[208],"acf":[],"modified_by":"Aradhana Gotur","jetpack_featured_media_url":"https:\/\/www.tickertape.in\/blog\/wp-content\/uploads\/2021\/09\/Ajay-modi-2.png?wsr","_links":{"self":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4381"}],"collection":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/users\/56"}],"replies":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/comments?post=4381"}],"version-history":[{"count":9,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4381\/revisions"}],"predecessor-version":[{"id":4497,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/posts\/4381\/revisions\/4497"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media\/4385"}],"wp:attachment":[{"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/media?parent=4381"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/categories?post=4381"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.tickertape.in\/blog\/wp-json\/wp\/v2\/tags?post=4381"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}