Investing in an IPO can be a rewarding opportunity—but only if you make an informed decision. Just because a company is going public doesn’t mean it’s automatically a good investment. Whether you’re aiming for quick listing gains or long-term growth, it’s crucial to evaluate each IPO carefully.
Remember, you are never obligated to invest in every IPO that hits the market. Instead, be selective and analytical. A thorough assessment of the company, issue pricing, and overall market conditions can help you decide whether to participate.
Here are the 5 most important factors to consider before investing in an IPO:
1. IPO vs. Secondary Market Valuation
Ask yourself: Is this IPO offering better value than buying established stocks in the secondary market?
Many IPOs are aggressively priced, leaving little room for post-listing gains.
Analyze whether the IPO valuation is justified based on business fundamentals and industry comparables.
Compare recent IPOs in the same sector and evaluate their listing and post-listing performance.
2. Promoter and BRLM Background
The pedigree of the promoter and the Book Running Lead Manager (BRLM) matters, but it’s not everything.
Established promoters (like HDFC, ICICI) tend to bring trust, but not every big-name IPO performs well.
Study their track record in managing other IPOs and the governance history of the company.
A good pedigree with bad pricing or a weak business model still doesn’t guarantee success.
3. Listing Gain Potential or Long-Term Growth
What is your objective—short-term listing gains or long-term investment?
If you’re aiming for listing gains, focus on subscription demand, GMP trends, and market momentum.
For long-term investors, evaluate the company’s business model, competitive edge, and growth plans.
Companies like Avenue Supermarts (D-Mart) or Shankara Building Products gained because of their unique, scalable models—not just hype.
4. IPO Bunching and Oversupply Risk
Too many IPOs at once? Be careful.
When multiple large IPOs launch simultaneously, investor attention and capital get divided, often impacting subscription levels and listing performance.
Even fundamentally strong IPOs may list flat in a crowded primary market.
5. Broader Market Conditions
Market sentiment plays a big role in IPO performance.
Avoid investing in IPOs during bearish or volatile phases, especially if you’re using borrowed funds.
In highly oversubscribed IPOs, borrowing to invest can backfire due to allocation uncertainty and interest costs.
Ensure that expected listing gains exceed your financing costs if applying via funding routes.
3 Types of IPOs to Avoid as an Investor
Not every IPO is worth your money. Here are three red flags to watch for:
1. Large Capital Base Companies
Companies with very large capital bases often have limited upside potential.
This is particularly true for sectors like infrastructure, where returns on capital are typically low.
Historical examples show that many such IPOs have eroded shareholder value post-listing.
2. Red Flag-Ridden Prospectuses
Avoid IPOs with multiple legal issues, regulatory risks, audit qualifications, or poor governance history.
Red herrings in the DRHP (Draft Red Herring Prospectus) are major warning signs.
Even if these stocks list well, they often underperform over time.
3. Negative Market Macros
When markets are under pressure from global headwinds, domestic policy issues, or macroeconomic uncertainty, IPOs can disappoint.
It’s often wiser to wait and buy such stocks post-listing at lower valuations.
Final Thoughts
In a vibrant market like India, the IPO pipeline will continue to grow. But as an investor, discipline and due diligence are your best tools. Study the IPO, examine the fundamentals, and never rush based on hype or fear of missing out.
When in doubt, sit it out. There will always be another IPO.
