Ipo Checkpoints
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Transcript of Ipo Checkpoints
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8/8/2019 Ipo Checkpoints
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If you hope to make money in public equity offers, you have to make some efforts and become an informed
investor, says Prithvi Haldea of Prime Database.
Further he adds, read the offer document carefully (though always remember it is still a sellers document).
Abridged prospectus is too difficult to read. If you have a problem, demand a full copy of the prospectus from
the company or from the lead managers. Their email IDs is given in the abridged prospectus. If they do not
provide, send a complaint to Sebi.
There is too much to read, so concentrate on key issues and try finding answers to the following questions
Is this an IPO or an FPO?
In IPOs, initial public offers, company decides the price and the collective secondary market
discovers the true price post-listing after more information inflows/analysis.
In FPOs, follow on public offers, the price is already discovered; gains/losses can only be marginal;
no new information for the market to analyze/process.
Is this a fixed-price or a book-building issue?
The methodology, classes of investors and issue pricing are totally different.
There is no book or price discovery in a fixed-price issue.
There are no reservations for FIIs/HNIs in a fixed-price issue; 50% of the issue is reserved for small
investors (in book building, it is 35%).
Fixed-price issues are typically small.
Is this a good promoter?
Get to know the promoter thats the key.
If the promoter is okay, almost all other factors will automatically get taken care of.
If there is any foreign collaboration of repute, it helps.
What is the promoters background and experience?
Experience in the same business/industry (promoting individuals/ promoting companies)
Is the promoter a liability or an asset?
Are there any material defaults/ litigations against the company or its promoters?
Persons/Companies that have not been compliant with laws of the land reflect a worrisome
mindset.
If you find too many defaults/litigations of a material nature or even one of a very serious nature, a
the issue.
Criminal proceedings against the promoters.
Check out record of past defaults of companies/ individuals at www.watchoutinvestors.com.
Issues in 2004-05 (Rs in crore) Source: Prime Database
IssueType
No. ofIssues
IssueAmount
Average sizeof Issue
Fixed Price 10 378.82 37.88
Book Building 19 21,052.74 1,108.04
http://www.watchoutinvestors.com/http://www.watchoutinvestors.com/http://www.watchoutinvestors.com/ -
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What is the status of the issuing company?
Holding company
Main company
How has been the performance of the company?
Number of years in the business
Size of the company
Growth rate
Market share and growth
Are the financials, specially the recent ones, reliable?
Many resort to window dressing; high sales often lie in sundry debtors, profits could be because of
a very high other income or unusual income.
Beware of bloated previous years financials; amazing how almost every company performs so
exceedingly well in the year and quarter preceding the issue! Look at aging of sundry debtors (and earlier write-offs).
Look for changes in accounting policies (depreciation etc.), in financial year.
Look if there are any significant Notes to the Accounts.
Look if there are any significant qualifications by the auditors.
What to look for in the Balance Sheet?
Fixed assets
Investments
Loan and advances
What are the key financial parameters/ ratios to look at?
Earnings per share (EPS)
EPS measures the earnings a company makes for each share in existence. It is calculated by
taking a companys net earnings and dividing them by the number of shares in issue.
A higher EPS is regarded as better than a low EPS as it means investors are earning bigger profits
for every share they own.
Investors look not only at the current EPS but also at estimates of future EPS to get an idea of the
profits they will earn in future years.
Price Earnings ratio (P/E)
The ratio you will see mentioned more than any other is the Price Earnings Ratio, which you will
often see represented as P/E.
The P/E measures whether a company is cheap or expensive. It is calculated by dividing a
companys share price by its earnings per share (profits after tax divided by the number of shares
in issue). As a rule, the higher the P/E, the faster its earnings are growing but if the P/E is high
compared with other companies in the same sector, it could also mean the shares are overvalued.
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This ratio enables any business to be compared with another, although in reality investors tend to
compare companies against those in the same industry sector or against the P/E on the entire
market.
Investors look not only at P/Es based on the past years earnings but also at estimates of future
P/Es, also known as prospective P/Es. This gives investors an idea as to how fast a companys
earnings are expected to grow in the future and, therefore, whether their shares are worth buying or
not.
PEG ratio
If you are investing in growth companies it is worth looking at a companys PEG ratio. This ratio,
which shows a companys P/E relative to its earnings growth rate, is worked out by taking the
prospective P/E ratio and dividing this number by the prospective EPS growth.
The lower the PEG ratio, the better value a companys shares are.
Return on capital
This ratio helps investors assess how hard a company is making its assets work. It is calculated bytaking profits before interest and tax are removed and dividing this figure by the capital employed.
Broadly speaking, the higher the return on capital, the more successful a company is.
EBITDA and EV
EBITDA is a profit key ratio that looks at the Earnings Before Interest, Tax, Depreciation and
Amortisation. It is used to assess the operative profitability of a company.
You can use this ratio to analyse companies that reinvest heavily in their businesses by taking the
Enterprise Value and dividing it by EBITDA.
How are the cash flows?
Is it negative?
What is the dividend track record?
No relevance in the case of IPOs
What is the promoters attitude towards shareholder rewards, in case of listed group companies?
Dividend policy
Bonus issues
Rights issues
De-listing of group companies
Past public issue pricing
How has been the performance of the group companies?
Number of years in the business
Size of the companies
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Growth rates
Market shares and growth
Financials
How significant are the related party transactions?
Is it a family business?
Do group companies constitute the main clientele?
Is most raw materials sourced from group companies?
Extent of related party financial transactions?
Is there any conflict of interest among group companies?
Are there companies in the group doing the same business?
Who is on the Board of Directors?
Family-controlled or broad-based
Independent directors
Key directors-in terms of experience and connections Compliance of Clause 49 of the Listing Agreement on Corporate Governance
What are the products/ services of the company?
Old economy/ new economy?
Cyclical?
Flavour of the season?
Upstream/ downstream?
Market outlook?
Be concerned about your own exposure to a particular industry.
What about technology?
Do not bother too much about this.
What about customers?
Over dependence on one or a few customers?
Too many fixed priced, long-term contracts etc?
What is the size of the issue?
A large issue ensures better allotment as also better liquidity.
What will be the public float after the issue?
This is critical as public float finally determines the liquidity.
What is the promoters holding after the issue?
A small post-issue stake does not inspire much confidence
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Is the price justified?
Do not be guided by par premium parameters
In Justification of Issue Price, look whether P/E has been calculated on recent period EPS or on
weighted average of 2-3 years.
Look at the peer group prices, but do not rely entirely on it.
Industry low/ average/ high figures of P/E are deceptive; there are no two similar companies, each
is unique.
What has been the capital build up?
Previous public issues/rights issues/overseas issues/preferential issues.
To whom, when, at what price?
Is there any venture capital/private equity fund investment in the company?
Who invested, when, at what price, for what stake?
How does the offer price compare with price of allotments made to them?
Are these now funds exiting fully or partially in this offer?
Partial exit or no exit is more confidence building; VCs are expecting a higher secondary market
exit price. In 2004-05, there were two such companies where VCs exited partially, NDTV and UTV.
What are the objects of the issue?
Finance a new project (new/diversification)?
Undertake expansion
Augment working capital?
Repay debt? (to promoters?)
Do acquisitions?
Fund subsidiaries?
Open branches?
For general corporate purposes?
Exit to promoters/others (offer for sale); No fund inflows into the company?
What are the components of the project cost?
Any oddities in the components of the project cost?
Comparison of cost of projects of two similar companies difficult as there would rarely be two
exactly similar projects.
What has been the utilisation of existing capacity?
Is the present capacity fully/ substantially being used?
How is the company financing the objects of the issue?
Is entire cost being funded by the present issue?
Is company committing any internal accruals to the project?
Is appraisal of any relevance?
Good, if appraised but not a critical factor
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Are there any further capital raising plans?
This may lead to a dilution of your earnings.
What is the time frame of deployment of issue proceeds?
Is it immediate or is it spread over next 2-3-4 years? If most of it is for later deployment, why money
being raised now?
Stretched deployment has its own hazards!
What are the key risk factors?
Lawyers are now listing out too many risk factors to crowd out significant ones (e.g. communal
India, South Asia conflict zone etc.)
Sebi insists on too many irrelevant risk factors (e.g. First-generation entrepreneurs, rented
premises etc.)
Identify critical internal risk factors; likely impact on the company family disputes?
Identify critical external risk factors; likely impact on the company
- Dependence on airport infrastructure?
- Future prospects of the principal? (stock exchange)
- Over dependence on one industry? (for raw materials or customers)
Are any major government approvals pending?
Some of these may have a major bearing on the company/project
- Intermediary registration with SEBI?
- NBFC approval from RBI?
- Banking approval from RBI?
- Pollution Control approval from PCB?
- Licenses to run cinema halls? Is the industry highly regulated?
Are there any significant trademark/ brand/ copyright issues?
This could be a problem area in many ways.
Does the company own these?
Recent case of Jet Airways and how it was resolved before the issue.
Serious litigation by others can hurt the company.
Where is the company listing?
Apply only if the company is listing at BSE/NSE.
If a company is listing only at regional exchanges, you will have no exit, as almost all regional
exchanges are lying closed.
Is the company/ group company already listed abroad?
Will have better disclosures
Will have better corporate governance
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Is there any special reservation for shareholders of the company/group companies?
A reservation increases the chances of allotments
What is the record of investor complaints in listed entities?
Type of complaints
Aging of complaints
Number of complaints
What additionally should one look for in an FPO?
Take a close look at the data of share prices/volumes in the recent period.
What should one look out for in case the company has any listed group company?
Take a close look at the details of the share prices/volumes in the recent period over at least last
one year
Besides offer document, should one look at other sources of information?
Business channels, financial newspapers and the regular media. You will often find issues being
discussed, graded etc.
Just one example: Capital market rating of Shoppers Stop: 45/100 with the header Buyers
Beware.
This may be useful but not a substitute for self-diligence.
If I get an allotment, how much and when should I sell?
There is no perfect answer. Exit depends upon your investment policy. Best is to set a target.
If you treat IPOs as a pure trading opportunity sell upon listing if profits are available.
If you are convinced about a company, do not sell in panic if it lists below the offer price
If you invest in an IPO not to buy a trading instrument but to own a part of that business, then hold
on.