Talking about the last year, during that time also the IPOs of many companies were very much discussed. But in most of the popular IPOs that came in the year 2021, the investors’ money is heavily sunk.
How to Select Good Stocks/IPO: Discussion is in full swing about the Initial Public Offering (IPO) of Life Insurance Corporation (LIC) in the year 2022. This is going to be the biggest IPO ever. The number of people opening demat accounts before the issue has also increased significantly. By the way, talking about the last year, during that time also the IPOs of many companies were in a lot of discussion. The most talked about name among them is Paytm i.e. One 97 Paytm. Apart from this, many issues were also very popular, in which the names of some companies with new age business are also there. For example Nykaa, Zomato, CarTrade Tech. But in most of the popular IPOs that came in the year 2021, the investors’ money is heavily sunk. Many are trading close to their issue price and some even below the issue price. That is, having a popular name is not a guarantee of profit. So there are some things to keep in mind while choosing a good IPO.
Popular IPOs and their status
One 97 Paytm: 73 percent weaker than the issue price
PB Fintech: 24% weaker than issue price
Fino Payments: 50% weaker than the issue price
FSN E-Co Nykaa: 31 percent weaker than record high
CarTrade Tech: 65 per cent lower than the issue price
Zomato: Shares come back on issue price
ABSL AMC: 29 per cent weaker than the issue price
How is the business of the company
Before choosing any issue, take a good look at the business of that company. See how the company’s track record of profits is. What does the growth outlook look like going forward? If the company is continuously going into losses, then its impact may be on the business going forward. On the other hand, stocks of high growth companies have scope for better returns. Check whether the product portfolio of the company is strong or not. Which company is constantly working with innovation?
Please check valuation
The valuation of the stock can be estimated from the P/E. If the P/E ratio is high, then investors assume that the valuation of the stock is high. On the other hand, if the valuation of the share is attractive, then you can get the share at a good price. If the company’s financial position is strong but valuations are cheap, then there is more scope for increasing returns going forward. Compare the company’s P/E ratio with those in similar businesses. At the same time, their market size should also be almost the same.
Focus on upper price band
If you are going to invest in an IPO, first of all focus on its upper price band. For example, if the price band for an issue is Rs 200-210 then the upper price band is Rs 210. With this, its correct value can be assessed.
Earnings Per Share (EPS)
Before investing in any IPO, be sure to know about the Earnings Per Share (EPS) for the current financial year. After this, estimate the EPS for the next financial year. With EPS, the financial position of any company can be ascertained. If the profit of a company is Rs 20 crore and the company has issued 1 crore shares worth Rs 10, then the EPS will be Rs 20. From this, the net profit per share accruing to the shareholders can be ascertained.
debt on company
Before choosing an issue, see how much the debt is on that company. Is the company reducing its debt or not? Too much debt on the company can also affect its profits. If the company is generating free cash flow, it means that there are better opportunities for further growth. Whereas the company can easily eliminate its debt.
Calculate Forward P/E Ratio
To find the forward P/E ratio, divide the upper price band by the estimated EPS for the next financial year. If the forward P/E ratio is low then there is a better chance to invest in IPO. But if it is more then there are chances of diminishing returns.
(Note: These tips have been taken from the websites of different brokerage houses. These are not the personal views of The Financial Express. Take expert advice at your level before investing.)
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