Financials to business model: Key factors to consider before investing in IPOs

India’s booming IPO market has caught the attention of investors with many public offers giving multibagger returns in 2024. With record fund raising through initial public offerings (IPOs) by companies across sectors, the momentum in the primary markets does not seem to be slowing down.

Several big-ticket IPOs are lined up in 2025.

As we bid adieu to 2024, the fundraising in the primary markets has reached record highs. More than 330 IPOs cumulatively raised nearly ₹1.8 trillion.

The growth in the IPO segment has been attracting new investors with many public offers seeing huge subscriptions. Though the maiden share sales could be an opportunity for investors to make quick money, the IPO investments are prone to high risk due to market conditions and other factors.

According to market experts, the investors should evaluate all key details about a company and carefully analyse the market conditions before investing in an IPO. The Red Herring Prospectus (RHP) filed by the IPO-bound companies should be the go to document for the investors.

Here’s what to look out for while investing in an IPOs:

Understand the Business Model

It is essential to assess a company’s business model before investing in its IPO. This includes the company’s core operations and how it generates revenue. A sustainable and scalable business model is a strong indicator of long-term growth potential. Companies that address significant market needs or operate in growing industries are better positioned for future growth. The RHP contains all details about the company’s business model, core operations and key competitors in a particular industry. This will give a clear idea about the growth potential of the company.

Analyse the RHP

The RHP provides detailed insights into the company, including its purpose for raising funds, risk factors, and financial history. Investors must pay close attention to how the company plans to use its proceeds generated from the IPO, be it for expansion, debt reduction, or operational needs. The RHP also carries details about the company’s strengths and risks. Analyse carefully the risk factors before investing in the IPO

as the company may even get affected due to factors beyond its control like global uncertainties, sectoral slowdowns and domestic policy changes.

Evaluate the Financial Health

It is critical to analyse the financial performance of a company before considering investing in its IPO. Review the company's profitability, revenue growth, and debt levels as disclosed in the RHP. Companies with consistent growth and manageable debt could be better positioned for success.

Assess the Valuation

Compare the company’s valuation with its peers in the same industry. Overvaluation can lead to poor performance post-listing, so it’s essential to ensure the IPO price aligns with the company’s financial metrics and industry benchmarks.

Examine the Promoter’s Background

The credibility and track record of the promoters and management team can significantly influence the company’s future. A strong leadership team with proven expertise in the industry adds to the company’s credibility.

Market Sentiment and Timing

Market conditions play a crucial role in an IPO’s success. A bullish market generally boosts IPO performance, while bearish sentiment can dampen investor enthusiasm. One must consider broader market trends and economic indicators before investing.

Conduct a Peer Comparison

Analysing similar companies already listed on the stock market can provide a benchmark for the IPO’s valuation and potential performance. Look at metrics such as price-to-earnings (P/E) ratios, profit margins, and market share for better insights. A sectoral analysis could also be helpful to get better insight into growth prospects of a company.