From 58 in 2023 to 59 already in 2024, the IPO listings are increasing rapidly in India. In terms of IPOs, the Indian stock exchanges came in third place globally in 2022. There is also a positive sentiment among investors and traders for the IPO.
In order to determine the fair IPO pricing and make the most of your investment, you must understand how is IPO price determined. You must also understand the meaning of IPO subscription and the role of demat accounting.
Understanding IPO Pricing and Company Valuation
Initial Public Offering refers to the SEBI-established process that companies follow through to offer their shares to public investors for the first time. IPO pricing, on the other hand, is the price at which these shares are offered to public investors.
Essentially, before a company goes public, it needs to evaluate how much it is worth. This is crucial because it sets the price of the shares that will be sold during the IPO. If the company is undervalued, it might miss out on raising the required funds. Overvalue it, and investors might shy away, leaving the IPO undersubscribed.
How is IPO Price Determined?
Companies use various methods to determine their value before going public, but some of the most common ones are:
1. Earnings and Revenue
One of the main factors investors look at is how much money the company is making. If a company has strong earnings and a growing revenue base, it’ll likely get a higher valuation. Investors want to know that the company is bringing in cash and has the potential to continue doing so.
2. Market Comparisons
Companies also compare themselves to other competitors in their sector. It compares the valuation to another company in the same industry that went public recently. For example, if a competitor’s IPO was valued at ₹1,000 crore, the company looking to go public will try to match or beat that, depending on their financials.
3. Future Potential
Valuations are also based on the future potential and where the company is heading. If the company has a solid growth plan, new products in the pipeline, or an untapped market, it can factor that into its valuation. Investors want to know that the company is not just doing well now but that they are in a good position to keep growing.
Secrets to Know Before Subscribing to an IPO
Here are the top secrets you must know before an IPO subscription:
- Check the Company’s Financials: Before you invest in any IPO, it’s crucial to check the financial health of the company.
- Understand the Industry: Is the company part of a booming industry, or are they in a sector that’s struggling? Industry trends can have a big impact on the company’s future performance.
- Look at Management: A company might have strong financials, but if the management team doesn’t have a solid track record, that could be a red flag.
The Role of IPO Subscription in the Valuation Process
Now, once the valuation is set and the company’s shares are ready to go public, that’s where IPO subscription steps in. Essentially, when the IPO opens, investors can apply for shares through the IPO subscription process. Remember that if an IPO is oversubscribed, meaning more investors and traders want shares than are available, it’s usually seen as a good sign.
It indicates that investors have a lot of confidence in the company’s potential. However, if it’s undersubscribed, that can be a red flag.
Once you’ve decided to participate in an IPO, demat accounting starts holding the utmost importance. You’ll need a demat account to hold your shares after the successful IPO subscription. Your demat accounting ensures that your shares are safe, easily accessible, and transferable.
Conclusion
There’s no set formula for understanding beforehand exactly how companies are valued before going public, but having a sense of the key factors can help you make smarter investment decisions. The next time you’re looking at an IPO subscription, consider the company’s valuation, how is IPO price determined, its industry prospects, and how its demat accounting will make managing your investments smoother.
