Whenever an Initial Public Offering (IPO) hits the market, it creates significant buzz among investors. It’s common to jump into investing based on the market hype. However, this isn’t the right thing to do. As an informed investor, you must analyze finer details, such as the issuing company’s fundamentals, strengths, weaknesses, valuation, etc., before investing in an IPO.
But do you know where you will find these details? The easiest way to analyze an IPO is to read the issuing company's Red Herring Prospectus (RHP). Continue reading to know what an RHP is and what you need to look into while assessing an IPO.
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RHP or Red Herring Prospectus is a legal document that an issuing company needs to file with the Securities and Exchange Board of India (SEBI) before launching its IPO. It is also known as the ‘offer document’.
It contains crucial details about an IPO and the issuing company, including the total number of equity shares that will be up for sale, estimated valuation, the company’s financials, past performance, name of the promoters, strengths, risks, and objectives of raising funds.
RHP is one of the most important documents that can help you evaluate whether or not to invest in an IPO. However, it is an extensive document that may extend to more than 500 pages. So, reading the entire RHP can be a cumbersome task for retail investors like you.
That is why we have segregated a list of some important things that you can look out for in RHP to analyse an IPO:
If you plan to invest in an IPO, the most crucial thing you need to understand is the issuing company’s business. It’s because you will potentially hold the shares of this company in the future. Try to understand the company's business model, the products and/or services it offers, and its future growth prospects.
Usually, companies operating in monopoly markets or technology businesses have good scope for growth in the future. Hence, investing in IPOs of such companies can yield good profits.
Another significant segment to look out for in an RHP is the issuing company’s financial information. This segment contains audited reports of the company’s profit or loss, total borrowings, net worth, and total assets under management. Knowing these details will give you an idea of how the company has performed in the past and the possibilities for generating future profits.
Companies must list their strengths and risks in RHPs for potential investors and other market participants to peruse. Reading about these details will help you understand a company better and make an informed investment. If a company's strengths outweigh the risks, its IPO can be a bright prospect for investment.
For example, a company with a loyal and diversified client base is bound to generate good profits. However, if a company operates in a highly competitive industry with a few legal cases pending against it, it’s better to avoid its IPO.
You should also look at how a company intends to use the proceeds from an IPO before investing in it. Companies issue IPOs for a variety of reasons. If a company plans to use IPO proceeds for mergers, acquisitions, and other expansion-related activities, it augurs well for investors. However, if a company intends to repay existing debts, its IPO must be approached cautiously.
At last, you can look at the issuing company’s management team and promoters. These people make crucial decisions regarding growth, expansion, marketing, etc. If a company boasts experienced managers and well-known promoters, investing in its IPO is a good idea.
Checking these things in RHP can help you decide to invest in an IPO. Instead of going by what others say, you can conduct your analysis and invest accordingly. If you don’t have a Demat account, you can open it for free with Motilal Oswal and enjoy exciting features.
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