An initial public offering (IPO) refers to the process of offering shares of a private corporation to the public in a new stock issuance. This allows a company to raise capital from public investors, who invest in IPOs in exchange for shares in the company.

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With IPOs overflowing the equity markets, finding out the best IPO to invest in can be tricky.

According to Raghvendra, Nath, managing director, Ladderup Wealth Management, the process for identifying a good IPO is similar to spotting a good equity investment, where one understands and studies the business model, promoter history and valuations.

"Ideally, investors should avoid investing based on herd mentality and do their own research. Generally, the quality IPOs come at a substantial premium compared to peer valuations. Also in most cases, investable IPOs are always oversubscribed, hence making it difficult to get an allotment. Thus, it is best to stand by for valuations to become justifiable, since the market has a prolonged history of correcting once in a while," Nath explains.

Let’s look at broader factors to evaluate in order to recognize a good IPO for investment:

Understand company's quality of underlying business and its management

As per Arshad Fahoum, chief product officer, Market Pulse, investors should understand the company’s core values, policies and enshrined objectives.

"It's important to learn about whether the company is a market leader, or if the industry is competitive. The right background forms the roadmap for future investment plans," Fahoum suggests.

Use strategic and financial consideration lens

According to Sunil Thakur, partner, Quadria Capital, the strategic considerations include market growth opportunity in which the company is operating, positioning of the company and competitive landscape, management track record, promoter shareholding (pre and post IPO) and private equity participation, if any.

On the financial consideration, Thakur says, investors should look at the scale and revenue of the company, topline growth strategy, quality of earnings, capital structure and return ratios.

"Companies that have prior PE investment provides an edge to the investor as they would have validated the business model and governance at the time of their investment," he advises.

Though it can get difficult to analyse a new listing’s financials, given the limited availability of their past record, Fahoum of Market Pulse says, it’s always helpful to study the financial statements to the best of one’s ability.

Analyze risks from the perspective of the market

Additionally, Fahoum says, it’s vital to understand the overall demand for the IPO from investors and gauge whether the stock price is available at a reasonable valuation.

"The best IPOs to invest in are those that provide a unique service and lead in the industry where they are positioned. Those are the ones that would outperform in the long run, beyond merely providing listing-day gains," he affirms.

When should one invest in IPOs?

Applying for an IPO is a timely investment in many cases, Fahoum says, but if one fails to secure a sizeable allotment during an IPO, another good time to invest in a newly listed company is when stock prices undergo correction; provided investors are convinced about the long term business prospects.

Disclaimer: The views and investment tips expressed by investment experts on CNBCTV18.com are their own and not that of the website or its management. CNBCTV18.com advises users to check with certified experts before taking any investment decisions.

(Edited by : Jomy)

First Published:Feb 19, 2021 6:02 PM IST