How to decide whether to invest in a particular IPO?

How to decide whether to invest in a particular IPO?

 First and foremost, find out the listed peers in the secondary
markets and if IPO is at a higher valuation then there is no
justification for investing.

 Check the results and growth rate in term of sales ,profit growth
,operating margins growth for the last 3-5 years and not only for
1 year as there are chances of financial engineering (manipulation)
of balance sheets just before the launch of the IPO.

 Check the background of the promoters and if there are any
serious criminal/income tax evasion cases against then avoid
the IPO (e.g. Gammon infrastructure IPO)

 Find out the purposes of raising the money. Some justified
reasons are expansion of capacity, new projects, while if the
sole purpose is meeting the working capital needs or repaying
the debts then it does not inspire enough confidence to invest in
that IPO.

 If the IPO is for a new project then we should check the
turnaround /breakeven time. One example is Reliance power
IPO where this time was huge and hence took a beating
(projected capacity of Reliance power in next 3-4 years
was less then current capacity of NTPC).

 Study the risk factors in the draft prospectus and see if they are
of real concern or acceptable risks in the normal course of
business.

 Check the subscription figures in QIB category as they are
considered to be smart /intelligent and have access to lot of
company information that retail investors do not have.

 Check the future growth prospects of the company and if the
future expected growth is huge or they are operating in a niche
segment or in a high growth sector for which no listed
companies exists in secondary markets, then higher valuations
may be justified.

 Never go by the grey market premium(GMP) of a particular IPO
to make your investment decisions as they can vary daily and
are mostly speculative in nature. (E.g. Reliance Power IPO
having a GMP of 450 listed at a premium of Rs 10-15 only while
TItagarh IPO having a GMP of Rs. 10-15 listed at a premium of
Rs 150).

 Subscription figures in Employee quota can tell you whether the
employees themselves are confident of the future prospects of
the company.

 Some other indicators of the quality of an IPO can be the rating
given by the agencies like ICRA, CRISIL or the reputation of the
Book running lead managers(Example is Enam financials which
manages only quality IPO's)

 Keep in mind allotment chances as well besides the quality of
the IPO. A medium quality IPO with good subscription chances
can give you better returns then a very good IPO with very less
subscription chances.

 Do not consider any of the above factors in isolation but look at
them together to arrive at any conclusion.