If you’ve ever wondered why one IPO is priced at ₹100 while another is at ₹1,500, you’re looking at the result of IPO Valuation. Unlike a regular stock whose price changes every second based on market demand, an IPO price is manufactured behind closed doors before the public ever sees it.

Valuing an IPO is part science (math and spreadsheets) and part art (storytelling and market mood). In 2026, with the Indian market seeing high-tech startups alongside traditional manufacturing giants, the methods of valuation have become more diverse. Merchant bankers must balance the company's desire to raise maximum capital with the investor's desire for listing gains Here is the big-picture breakdown of how a company’s worth is calculated before it hits the exchange.

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The 7 Key Pillars of IPO Valuation

A merchant banker doesn't just look at last year's profit. They analyze the company through seven critical lenses:

1. Relative Valuation (Peer Comparison)

This is the most common method. The banker looks at similar companies already listed on the NSE or BSE.

The Logic: If Company A (already listed) is trading at 20 times its earnings, then the New Company B in the same sector should also be priced around a similar P/E (Price-to-Earnings) Ratio.
Metrics Used: P/E Ratio, P/S (Price-to-Sales), and EV/EBITDA.

2. Absolute Valuation (Discounted Cash Flow - DCF)

This is the Math-Heavy approach. Instead of looking at others, the banker looks only at this company's future.

The Logic: They project how much cash the company will earn over the next 10–20 years and then discount that money back to what it is worth today.
Best For: Companies with steady, predictable cash flows like infrastructure or utilities.

3. Qualitative Factors (The Unseen Value)

Not everything is on a balance sheet. Bankers put a price on Intangibles:

Management Quality: Is the CEO a visionary with a clean track record?
Brand Power: Does the company own a household name that people trust?
Corporate Governance: How transparent is the company’s leadership?

4. Industry Trends & Market Size (TAM)

A company in a shrinking industry (like coal) will be valued lower than a company in a booming industry (like Green Hydrogen or AI).

Total Addressable Market (TAM): Bankers calculate how much the company can grow if it captures a larger share of its industry.

5. Historical Financial Performance

The last 3–5 years of Revenue, Profit Margins, and Debt-to-Equity ratios are audited. A company with Consistent Growth (e.g., 20% growth every year) gets a much higher valuation than a company with Zig-Zag profits.

6. Investor Demand (The Roadshow Feedback)

Before the price band is fixed, bankers conduct Roadshows to meet big fund managers (QIBs). If the big players say, We won't buy at ₹500, but we love it at ₹450, the valuation is adjusted to match institutional appetite.

7. The IPO Discount

To ensure a successful listing, bankers often intentionally price the IPO at 10-15% below its true value.

The Reason: This money left on the table creates a high Grey Market Premium (GMP) and ensures the stock opens in the Green on listing day, keeping everyone happy.

Common Valuation Multiples (Comparison Table)

Investors use these ratios to quickly judge if an IPO is Cheap or Expensive:

Metric

Full Form

What does it tell you?

When to use?

P/E Ratio

Price to Earnings

How much you pay for ₹1 of profit.

For profitable companies.

P/B Ratio

Price to Book

Price vs. the company's Net Assets.

For Banks & NBFCs.

P/S Ratio

Price to Sales

Price vs. total Revenue.

For high-growth, loss-making startups.

EV/EBITDA

Enterprise Value to Cash Profit

The Real cost of buying the whole business.

For Capital-heavy industries.

The 2026 Valuation Trend: Focus on Path to Profit

In 2021-22, many tech companies listed at sky-high valuations despite being in deep losses. In 2026, the market has matured.

The Change: Investors and bankers now prioritize Sustainable Profitability over Revenue Growth at any cost
The Unit Economics Rule: Even for a startup, bankers now look for positive contribution margins before setting a high IPO price.

Frequently Asked Questions (FAQs)

Who has the final say in the IPO price?

It is a combined decision between the Company Promoters and the Lead Merchant Bankers. SEBI does not decide or approve the price; they only ensure all the math is disclosed transparently.

Can an IPO be Overvalued?

Yes. If the company sets the price too high compared to its peers or its actual profits, the IPO might get poor subscription and list at a Discount (a loss for investors).

Why do some IPOs have a huge P/E ratio (like 100x)?

This happens when the market expects the company to grow its profits extremely fast in the future. It’s common in niche tech, SaaS, or high-growth sectors.

What is Enterprise Value (EV)?

EV is a more accurate measure than Market Cap. It is: $\text{Market Cap} + \text{Debt} - \text{Cash}$. It tells you how much it would actually cost to buy out the entire company.

Does the Grey Market Premium (GMP) affect valuation?

Officially, no. But unofficially, bankers watch the GMP to see if they can push the price band a little higher or if they need to be more conservative.

What is Earnings Dilution?

When a company issues new shares in an IPO, the total number of shares increases. This means the profit is now shared among more people, which can slightly lower the value of each share.

How do I know if an IPO is fairly valued?

Open the RHP and look for the section Basis for Issue Price It will show a table comparing the IPO company's P/E and RoNW (Return on Net Worth) with its listed competitors.

What is Pre-Money vs. Post-Money valuation?

Pre-money is the company's value before the IPO. Post-money is the value after adding the new cash raised in the IPO.

Why do bankers look at Last Private Funding rounds?

If a company raised money 6 months ago from a VC at a ₹1,000 Crore valuation, it usually tries to launch its IPO at a higher valuation (e.g., ₹1,200 Crore) to show growth.

What is a Valuation Bubble?

It's a situation where everyone is so excited about a sector (like Internet in 2000 or EV in 2021) that prices are driven up by hype rather than real company profits.

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