Many times you have seen ads in news that a new company launching its shares in the stock market. After this buzz , Everyone starts talking about it, and news channels are saying it could be a great opportunity.
You will think, "Should I invest in this IPO?"
Many people get excited about IPOs, thinking they will make quick profits. But some IPOs perform well, while others fail. This is a common myth that IPO means money is going to double. Many do not know even what is IPO and they just go and invest in it.
Example: In 2021, the Paytm IPO was one of India’s biggest IPOs. Paytm is a brand. Almost every citizen in India has encountered with paytm either as a seller or buyer. Paytm has made a payment ssytem more lucid and easy. Just tap and payment done.Many investors thought it would be a jackpot, but after listing, the stock fell by more than 50% in a few months.Means Investors fund remained half.
This shows why analyzing an IPO before investing is very important. In this guide, I will explain everything in simple language so that even if you are new to investing, you can understand how to evaluate an IPO properly.
What is an IPO?
Let's start simple. We aready have familiar with Zomato. Before IPO , only few people owned it. I mean promoter and some investors.Then they did an IPO, which means they let everyone buy a small part of the company. It's like a shop's first day - they open their doors and invite everyone to become part owners. They did this because they want more money for business and they did not choose bank for loan and they chosen stock market for their fund generation.
Learning from Real Indian IPOs
Let me show you what actually happened with some famous IPOs:
The Zomato Story
- IPO Price: ₹76
- First Day High: ₹169 (everyone was excited!)
- One Year Later: ₹41
- If you invested ₹10,000, it became ₹5,400
This taught me something important: just because we use and like a company doesn't mean its shares will always go up.
The LIC Story
- India's biggest IPO ever!
- IPO Price: ₹949
- First Day: Dropped to ₹872
- Six Months Later: ₹628
- A ₹10,000 investment became ₹6,600
Even big, famous companies can see their share price fall after an IPO.
The Paytm Experience
- IPO Price: ₹2,150
- First Day High: ₹1,955
- After One Year: ₹475
- Money Lost: If you invested ₹10,000, it became ₹2,200
Nykaa's Journey
- IPO Price: ₹1,125
- First Day High: ₹2,574
- After One Year: ₹975
- Money Lost: If you invested ₹10,000, it became ₹8,670
Step 1: Understand the Business
Before investing in an IPO, you must understand company business. If you can understand what company sales or give service then you can move forward for further analysis , if you dont understand their business do not invest in it.
Ask yourself:
- What is the company selling? (Products or services)
- Is the demand for this business growing?
- Does the company have strong competitors?
Example 1: Zomato IPO (2021)
- Zomato is a food delivery company.
- The online food delivery industry was growing fast in India. As we have seeen in Covid times.
- Zomato had strong competitors like Swiggy, but it had a large market share. Now there are more companies has come up. Thus it has high competition.
Since the food delivery business was growing, investors believed Zomato had long-term potential. The IPO was a success, and the stock performed well after listing.
Example 2: Reliance Power IPO (2008)
- The company was in the power sector, promising future electricity projects.
- Investors were excited and oversubscribed the IPO.
- But the company had no completed projects, and after listing, the stock crashed. Company has failed to deliver projects. IPO was just hype and Manipulated.
This shows why you should not invest based on hype but check whether the company has a strong business model.
How to check business details?
- Read the Red Herring Prospectus (RHP), which is a company document before the IPO.
- Search for who its competitors are and how the industry is performing.
Pro-Tip: Always Check Revenue and net profit.It should Be rising!
Step 2: Check the Financial Performance
A company’s financial statements show whether it is making profits or running losses. This is most important step. But to understand finance you should have knowledge abut it. If you dont have deep knowledge also you can learn basic terms from youtube and check below terms.
Look at three key things:
- Revenue Growth – Is the company making more money every year? It means If sales is rising or Not ?
- Profitability – Does the company actually make a profit? Look at net profit of company and compare with previous years. It should be rising.
- Debt Levels – A company with high debt has more risk. Check how much a debt has company taken.
Example 1: Nykaa IPO (2021)
- Nykaa is an e-commerce company selling beauty products. Most popular among beauticians and women's.
- The company had consistent revenue growth and a strong business model. Sales increasing every year.
- Investors trusted the brand, and after IPO listing, the stock performed well.
Example 2: Paytm IPO (2021)
- Paytm had huge losses and was not making profits.But it has huge user base and very much popular among mobile users.
- Investors ignored this warning and still invested in the IPO.
- After listing, the stock crashed because investors realized the company was overvalued and unprofitable.
To check a company's financial performance:
- Look at the balance sheet and profit & loss statement in the RHP.
- Avoid IPOs of companies that are consistently making losses unless they have a strong future growth plan.
Step 3: Check If the IPO is Overpriced (Valuation Analysis)
Companies can set their IPO price according to their need. Sometimes they price high to attarct investors. But a high price does not always mean the stock is valuable.
You should always analyse valuation check by comparing the company’s valuation with its competitors.
Example 1: TCS IPO (2004)
- TCS was a leading IT company with strong financials and a reasonable IPO price.
- Investors trusted the company, and after the IPO, the stock kept growing.
Example 2: Paytm IPO (2021) – Overpriced Stock
- Paytm set a very high IPO price despite making losses.
- The stock price fell more than 50% after listing because investors realized they overpaid.
How to check valuation?
- Compare the Price-to-Earnings (P/E) ratio with similar companies. A lower P/E ratio means a better valuation. To check PE ratio , you can visit websites such as screener or moneycontrol.
- Check if the company is fairly priced or just trying to collect more money from investors.
Step 4: Where is the IPO Money Going?
A company bring IPO to raise money. But why they need this money is important.Every company is close their needs in rhp. Read carefully. The use for fund should for good reason such as:
- Expanding the business (opening new stores, launching new products).
- Investing in research and development (building better technology).
- Paying off debts to reduce financial risk.
Example 1: IRCTC IPO (2019)
- The company raised money to improve railway ticketing and expand catering services.
- Investors trusted the plan, and after IPO listing, the stock price rose significantly.
Example 2: Vodafone Idea IPO (2007)
- The company raised money but used it to repay debts instead of expanding the business.
- The stock price later crashed, as the company failed to grow.
Always check how the company plans to use the IPO money in the prospectus before investing.
Step 5: Who is Running the Company? (Management Check)
The company’s future depends on who is leading it.
Check:
- Who are the promoters and management team?
- Do they have experience in the industry?
- Are there any past fraud cases or controversies?
Example 1: Infosys IPO (1993)
- Infosys had a strong management team with Narayana Murthy leading it.
- Investors believed in the leadership, and Infosys became one of India’s top IT companies.
Example 2: Yes Bank Crisis (2019)
- The bank’s management was involved in financial fraud.
- Investors who trusted the company lost a lot of money when the stock crashed.
Lesson: Invest in companies with trusted and experienced management.
Step 6: Check Market Sentiment (Grey Market Premium & Subscriptions)
Before an IPO lists, some investors trade shares unofficially in the grey market. The Grey Market Premium (GMP) shows whether investors expect the IPO to perform well.
- If GMP is high, it means there is strong demand.
- If GMP is low or negative, investors are not interested.
Example 1: HDFC AMC IPO (2018)
- Had a high grey market premium before listing.
- The stock performed well after the IPO.
Example 2: Reliance Power IPO (2008)
- Had a high GMP before listing, but investors ignored the company’s weak fundamentals.
- The stock crashed after the IPO, leading to huge losses for investors.
Remember, GMP is only an indicator and not a guarantee.
Final Checklist Before Investing in an IPO
Good Signs (Safe IPOs to Invest In)
- Strong business model and well known brand.
- Consistent revenue rising over years and profit growth.
- Fair IPO pricing (not overpriced).
- Experienced and trusted management team.
- Money raised is used for business expansion.
Red Flags (Avoid These IPOs)
- Loss-making company with no clear growth plan.
- Overpriced IPO compared to competitors.
- High debt and weak financials.
- Promoters selling too many shares (lack of confidence in business).
Should You Invest in an IPO?
An IPO can be a great opportunity, but not all IPOs are profitable.
Before investing, always check the company’s business model, financials, valuation, management, and market sentiment. If everything looks good, the IPO may be worth investing in. If there are red flags, it’s better to skip it than regret later.
I hope this guide helps you make better IPO investment decisions! Let me know if you have any questions.
