Most retail investors apply to IPOs based on three inputs: their broker’s push notification, the oversubscription figure, and Telegram group excitement. This is how people end up holding Paytm at ₹2,150 for two years as it falls to ₹400. A little homework before applying takes 30–45 minutes and can save you from significant losses.
Check 1: Company Financials (Revenue, Profit, Growth Trend)
The DRHP (Draft Red Herring Prospectus) is free on SEBI’s website and both BSE and NSE’s IPO portal. You don’t need to read all 500 pages. Go to the financial statements section and check three years of data:
- Is revenue growing year-on-year? At what rate?
- Is the company profitable? If not, is there a clear path to profitability?
- Are operating margins expanding or contracting?
- Is the company generating positive operating cash flow?
A company with declining revenue, expanding losses and negative cash flow is not a business you want to own — regardless of how exciting the sector sounds.
Check 2: Objects of the Issue
Why is the company raising money? The answer matters enormously. Three possible scenarios:
- Growth capex (positive): Building new facilities, expanding stores, investing in technology — the company plans to grow with your money.
- Debt repayment (neutral at best): Using fresh equity to pay off old loans. You’re essentially helping the promoter fix a balance sheet problem.
- Offer for Sale (watch carefully): Existing shareholders — promoters, PE investors — are selling their shares. The company receives zero from OFS proceeds. If OFS is 80%+ of the total issue size, ask why insiders are rushing to exit.
Check 3: Promoter Background and Shareholding
Look up the promoters on MCA (Ministry of Corporate Affairs) portal and SEBI’s enforcement actions database. Any previous SEBI orders against them? Any history of corporate governance failures at other companies they’ve run?
Also check post-IPO promoter shareholding. A promoter dropping from 80% to 25% in one IPO is very different from one going from 70% to 55%. The first signals the promoter wants out quickly. The second signals long-term commitment to the business.
Check 4: Valuation vs Listed Peers
Every DRHP includes a peer comparison table. Check the IPO’s PE ratio (or EV/EBITDA for pre-profit companies, or EV/Sales for early-stage businesses) against established listed competitors.
If the IPO is priced at 60x PE when comparable listed companies trade at 20x, the premium requires strong justification — typically very high growth rates. If growth rates don’t support the premium, the stock will likely derate post-listing once the excitement fades.
Check 5: Market Conditions
IPOs cluster at market peaks. When Nifty is at all-time highs and every investor is bullish, that’s when companies choose to list — because they can demand the best valuation. As a buyer, that means you’re paying peak prices for a new, unproven listed entity.
This doesn’t mean never apply in a bull market — but apply more selectively, with a higher bar for valuation comfort. In bear markets or corrections, the IPOs that still come to market are often genuinely good companies that need capital for growth and can afford to price more reasonably.
Frequently Asked Questions
What is the difference between DRHP and Red Herring Prospectus?
The DRHP (Draft Red Herring Prospectus) is the document filed with SEBI for review. SEBI may send comments requiring changes. After incorporating SEBI’s observations, the company files the final Red Herring Prospectus (RHP) with the exact price band — this is the document you should read when the IPO is actually open for subscription.
How do I find an IPO’s valuation compared to peers?
The RHP always includes a section titled “Statement of Possible Tax Benefits” or “Comparisons with listed industry peers” — scroll to find the peer comparison table. Also useful: check the valuations of listed competitors on NSE/BSE directly and compare the PE ratios manually.
What is anchor investor allotment and why does it matter?
Up to 60% of the QIB portion in a mainboard IPO can be allotted to anchor investors (institutional investors who commit before the issue opens). Anchor investor allocation is disclosed the day before the IPO opens. If reputable domestic mutual funds are anchor investors, it’s a quality signal — they’ve done due diligence and chosen to participate at the IPO price.