Investing in IPO made easy. Understand these things before investing.

Here are a few things you should consider before investing in IPOs.

India added more unicorns to take the number to over 100 in 2022. Investing in IPOs might have made you slightly richer or even slightly poorer. Ironically, 2022 gave many startups a big reality check. The big stars of the previous year in Nykaa, PolicyBazaar, Delhivery, Paytm, and Zomato had over 60% crashes in their valuations. While these companies did a great job making it big, they could not sustain growth without burning capital.

Tech companies are doing well this year. Go Mechanic expanded quickly, from hundreds to over 7,00,000 customers. However, it is making headlines for the wrong reasons. Interestingly, the company has fired over 70% of its workforce. Its founder admitted that the problem was chasing growth at all costs, which included financial misreporting. Sequoia Capital India and Tiger Global were two of the company's major investors.

Also Read: How is the price of an IPO decided?

Byju was one of the upcoming IPOs but has made headlines for mass layoffs, alleged course misselling, and accounting irregularities. Blackrock and Sequoia were its investors.

How to Invest in IPO? mnbnnvestors.

• While an owner looks to grow sustainably and ethically, an exit-minded approach looks to grow at any cost.
• The best exit route comes with an IPO. While it ends the journey for the founders and initial investors, it is a nightmare for retail investors.
• We might witness many loss-making companies in the upcoming IPOs, but investors should look carefully before investing and avoid falling for the next big fad.
• It would be best to be mindful of the risks in this fast-evolving world.
• The best bet would be to bet on companies that have fought disruptions in the past instead of going after the next big fad.

We can expect businesses to survive changing interest rates, pandemics, changing governments, and geopolitical uncertainties. However, surviving dishonesty and bad management is a different ballgame. Play according to the management as an investor and only bet on quality. 

Also Read: Difference between a confidential and traditional IPO filing.

How Do I Choose Stocks?

Here are a few signs that you can look for while choosing stocks or investing in IPOs:

• Positive operational cash flow: Looking only at earnings growth can make you a victim of accounting gimmicks where profit is only on paper. A significant difference between earnings and operational cash flow is a bad sign and requires a deeper analysis. It would be best to deeply analyse the companies that have made these moves with more diligence.

• Non-Financial Companies With Less Than One Debt-Equity Ratio: It signifies sustainable growth rather than growth disproportionately reliant on borrowed capital. High-debt companies can perform well every now and then but are fragile. An event can possibly bring the house of cards down and lead to massive losses. 

• Average ROCE or Median > 15% : It reflects the management's prudence regarding decisions related to capital allocation. If any business does not offer a good return on invested capital, the chances of getting a good return on the invested amount in its stock are less.

• Lesser Promoter Pledging Is Better: Look for the pledge trend, if any. Look at whether it increases or decreases with time. You must be cautious with over 15% pledging, and even more cautious where promoter stake is low but pledging is high. There can be bulk selling of such shares when there's a market correction. 

These are a few things you should consider when investing in IPOs. These are not only true for IPOs but also for investing in general. Your IPO selection criteria should fulfil some requirements that we have discussed above. We hope this helps you invest better. Until next time!