How to Select Good IPOs of Unlisted Companies and Startups Without Historical Data?

A guide on how to do pre-IPO research for an unlisted company or startup

Good IPOs of Unlisted Companies

Dozens of companies get listed every year through Initial Public Offerings. Last year alone saw 65 mainboard IPOs, starting with Antony Waste on New Year’s Day and ending with CMS Info Systems on the last day of the year. You cannot simply apply for any and every IPO that comes knocking on the SEBI door. For every successful Nureca and Paras Defence, there are many other misses. Track IPO performance of a giant like LIC which is trading roughly one-third below its offer price. So, the question is how to select good IPOs.

Also Read: All set to play the IPO game, take this quiz first

While LIC was well-known even before its listing, there are numerous smaller companies including startups which don’t have any historical data or don’t have a legacy in the first place. IPO analysis in such cases would require a more detailed approach.

The Red Herring Prospectus

The data of an unlisted company is not generally available publicly. But upcoming new companies on stock market must prepare a Red Herring Prospectus, or simply the prospectus, before the IPO. Any company going for an IPO must file the prospectus with the Securities and Exchange Board of India (SEBI). For you, this prospectus will act as the “go-to” IPO guide. Here are some of the useful information you will find in the red herring prospectus.

  • About the Business – The prospectus explains the business model of the company and highlights its revenue streams and model. You should be convinced by the prospects of future income flow of the business as stated in the prospectus.
  • Risks to the Business – In the Risk Factors section, the company will disclose the various business and financial risks it is facing. You must understand the probability and impact of these risks as a part of your IPO review. The information should convince you that the company is equipped to mitigate these risks without any disruption to its operations and performance.
  • Financials – Financials of publicly listed companies are easily available. For a startup or a to-be stock market-listed company, you can check the prospectus for three years of financial statements. Assets and liabilities of the company, indicate its debt position, cash reserve and other indicators of financial strength. Its income and expenses will indicate the steadiness of revenue flow and operational efficiency in managing costs. 
  • People at the helm – Find out about the senior management, promoters and directors in your IPO analysis. A reassuring track record of the key management personnel is an encouragement for interested retail as well as institutional investors. It is the management who will handle the proceeds of the public issue, and it is their foresight that will help the company grow and expand and use the funds sustainably.
  • Utilisation plans – A very important part of IPO analysis is the utilisation plan of the company. How the company utilises its IPO proceeds goes on to define its future as a business enterprise. If a large portion of the proceeds goes into the settlement of debts vis-à-vis another company that invests it for expansion, you should choose the latter.
  • About the Public Issue – In the prospectus, you can check the share offered to the public by the promoters. Significant promoters' sell-off is a warning sign for potential investors. The price band and lot size, offer opening and closing date, the amount raised etc. are other information you should check in the prospectus. 

External Research

For the larger picture around the IPO, you must also look around for any other information that can have a bearing on the IPO and the company’s post-listing stock performance.

  • Market – Exercise caution when the market is too high or too low. Market sentiments influence the listing price of the IPO shares, sometimes unfairly.  
  • Sector –Rather than looking at the stock in isolation, analyse the performance of the sector. The presence of competitors and their market grasp is also important to consider. 
  • Pricing – As seen in the case of LIC IPO, the offer pricing may not always reflect Dalal street calculations. Price to earnings, price to sales, and net income per share are important benchmarks in finding out if the stock is fairly priced. 

Also Read: LICs share price down almost 35% what investors need to know about LICs stock slump buy, hold or sell

  • GMP – Although Grey Market Premium cannot be fully confirmed, it is a dipstick check on the market sentiments around upcoming IPOs. 

Always refer to study materials and expert videos for specific IPOs and on how to do analysis of IPOs in general. It is always wise not to decide solely on the mass sentiments or stature of the company. With in-depth research, you can ensure that your IPO investment delivers good listing gains and long-term growth. Here is the IPO performance last ten years 

Dozens of companies get listed every year through Initial Public Offerings. Last year alone saw 65 mainboard IPOs, starting with Antony Waste on New Year’s Day and ending with CMS Info Systems on the last day of the year. You cannot simply apply for any and every IPO that comes knocking on the SEBI door. For every successful Nureca and Paras Defence, there are many other misses. Track IPO performance of a giant like LIC which is trading roughly one-third below its offer price. So, the question is how to select good IPOs.

Also Read: All set to play the IPO game, take this quiz first

While LIC was well-known even before its listing, there are numerous smaller companies including startups which don’t have any historical data or don’t have a legacy in the first place. IPO analysis in such cases would require a more detailed approach.

The Red Herring Prospectus

The data of an unlisted company is not generally available publicly. But upcoming new companies on stock market must prepare a Red Herring Prospectus, or simply the prospectus, before the IPO. Any company going for an IPO must file the prospectus with the Securities and Exchange Board of India (SEBI). For you, this prospectus will act as the “go-to” IPO guide. Here are some of the useful information you will find in the red herring prospectus.

  • About the Business – The prospectus explains the business model of the company and highlights its revenue streams and model. You should be convinced by the prospects of future income flow of the business as stated in the prospectus.
  • Risks to the Business – In the Risk Factors section, the company will disclose the various business and financial risks it is facing. You must understand the probability and impact of these risks as a part of your IPO review. The information should convince you that the company is equipped to mitigate these risks without any disruption to its operations and performance.
  • Financials – Financials of publicly listed companies are easily available. For a startup or a to-be stock market-listed company, you can check the prospectus for three years of financial statements. Assets and liabilities of the company, indicate its debt position, cash reserve and other indicators of financial strength. Its income and expenses will indicate the steadiness of revenue flow and operational efficiency in managing costs. 
  • People at the helm – Find out about the senior management, promoters and directors in your IPO analysis. A reassuring track record of the key management personnel is an encouragement for interested retail as well as institutional investors. It is the management who will handle the proceeds of the public issue, and it is their foresight that will help the company grow and expand and use the funds sustainably.
  • Utilisation plans – A very important part of IPO analysis is the utilisation plan of the company. How the company utilises its IPO proceeds goes on to define its future as a business enterprise. If a large portion of the proceeds goes into the settlement of debts vis-à-vis another company that invests it for expansion, you should choose the latter.
  • About the Public Issue – In the prospectus, you can check the share offered to the public by the promoters. Significant promoters' sell-off is a warning sign for potential investors. The price band and lot size, offer opening and closing date, the amount raised etc. are other information you should check in the prospectus. 

External Research

For the larger picture around the IPO, you must also look around for any other information that can have a bearing on the IPO and the company’s post-listing stock performance.

  • Market – Exercise caution when the market is too high or too low. Market sentiments influence the listing price of the IPO shares, sometimes unfairly.  
  • Sector –Rather than looking at the stock in isolation, analyse the performance of the sector. The presence of competitors and their market grasp is also important to consider. 
  • Pricing – As seen in the case of LIC IPO, the offer pricing may not always reflect Dalal street calculations. Price to earnings, price to sales, and net income per share are important benchmarks in finding out if the stock is fairly priced. 

Also Read: LICs share price down almost 35% what investors need to know about LICs stock slump buy, hold or sell

  • GMP – Although Grey Market Premium cannot be fully confirmed, it is a dipstick check on the market sentiments around upcoming IPOs. 

Always refer to study materials and expert videos for specific IPOs and on how to do analysis of IPOs in general. It is always wise not to decide solely on the mass sentiments or stature of the company. With in-depth research, you can ensure that your IPO investment delivers good listing gains and long-term growth. Here is the IPO performance last ten years 

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