The IPO market has been buzzing. But if you’re looking to bid for multiple IPOs, you may have no time to read the fat prospectuses of 500 to 600 pages that accompany each one. So here are five specific prospectus checks that can help you vet every IPO.
Internal risks
SEBI takes a very serious view of newbie companies hiding any looming risks to their business from the public. Therefore, IPO firms try their best to cover every possible thing that can go wrong with their business in the ‘risk factors’ section. While ‘external’ risk factors are usually generic, ‘internal risk factors’ are specific to the company. Do go over them with a fine tooth comb, as these can sometimes flag risks to the very existence of a business.
Varun Beverages, the bottler for PepsiCo India, which made a ₹1,100-crore offer recently, discloses that its franchisee arrangement with PepsiCo India for 17 States and two Union Territories is valid for ten years up to 2022. But the franchisee arrangement is non-exclusive. Pepsico has the right to ‘unilaterally terminate’ this arrangement with a 12-month notice. It can also terminate the arrangement if Varun’s debt-equity ratio exceeds two times.
This apart, pay special attention to the lawsuits against the company. A fairly long list of commercial disputes is usual. But you need to be wary if there’s litigation hanging over a critical business asset, like the brand or main facility.
Promoter stake build-up
Is the IPO over-priced? The best way to gauge this is to check out the valuation multiple for the offer at the price band.
But the prices at which large shareholders have bought into the company in recent years can give you excellent cues too. Past share purchases are available in the section ‘capital structure’ under the ‘build-up of promoter holdings.’ In the ICICI Pru Life IPO, for instance, the prospectus reveals that the company allotted shares to an Azim Premji outfit and an arm of Singapore’s Temasek Holdings at an average price of ₹226.3 per share in December 2015 and March 2016. That’s a good 33 per cent below its final offer price of ₹334 just six months later.
Basis of issue price
Most IPO investors lose money not because the business is shaky, but because they have bought into it at fanciful prices. Every IPO firm is supposed to justify its offer price to its investors in its prospectus. Some companies present an elaborate justification of their offer pricing. Others get by with skimpy disclosures.
But even if you don’t go by the company’s reasoning, the ‘basis of issue price’ section helps you check the company’s latest EPS (earnings per share) and book value as per restated financials.
Then, there’s the comparison of valuation multiples for the IPO firm with its industry peers. The recent PNB Housing IPO offered a good comparison with as many as six of its real rivals. It revealed that the most expensively valued housing finance stock — Gruh Finance — traded at a steep 14 times book value, while the cheapest — Dewan Housing — traded at 1.6 times. PNB Housing was offered at 2.4 times post-issue book value.
Industry and company overview
Industry information is not a problem for companies operating in highly visible sectors like banking. But when a company operates in a niche sector about which little is known, the ‘industry overview’ section can come to your rescue. The prospectus of Green Signal Biopharma which is making its IPO this week has a detailed overview of the Indian vaccine market. This tells us that the BCG vaccine requirement for the Indian immunisation programme is now sourced from just two private companies — Serum Institute and GreenSignal Biopharma.
The ‘our business’ section is where the company offers details of its business and makes a pitch for why it is better than its rivals. Green Signal Bio Pharma claims in this section that it is one of just four companies worldwide pre-qualified to supply BCG vaccine to WHO.
Record of merchant banker
There used to be a time when one could gauge the quality of an IPO merely by looking at its merchant bankers. But even top-notch bankers sometimes bring duds to the market. Now, a new section in the prospectus mandated by SEBI, helps us gauge the merchant bankers’ track record. You will find this section at the fag end of the prospectus tucked away in “other regulatory disclosures” (some provide links). It reveals the stock price performance of the IPOs handled by the same banker for the last year, for various time frames. There’s also a useful summary of the proportion of IPOs handled by them languishing below offer price six months after the issue. PNB Housing’s prospectus shows that Kotak Mahindra Capital handled 16 IPOs in the past year, of which half were at a discount a month after the issue.