Remember the days when we wrote exams on paper sheets, there was a generally accepted norm to score well. Write more pages, take extra sheets. Regardless of the content, the first impression on the examiner would be — this student has put in the effort and knows quite a bit. If you can't answer the specifics, more words and pages could help. In a cumbersome process of examining papers and teacher fatigue, somehow it worked.
The DRHPs for IPOs are no different. Although the information needed to value a company can be summarised in 10 pages, what we get is 600 pages of the dump. You are the examiner here. Good luck!
If you've found yourself in this situation after downloading the recent DRHPs, let's examine some critical pointers to look for before you decide to buy that IPO. This is in no way a comprehensive list but gives you broad pointers to explore. The first pages to search are the balance sheet, income statement and cash flow statement. These are mostly one after the other.
Most IPOs of new-age companies love to quote rising sales. In absence of profits, this is the only metric they want to be valued for. The story however is far from simple. Many recent companies have tried various diversifications and folded many failed initiatives. In many cases, they have acquired companies just to buy topline. One should explore the products and subsidiaries that contribute to sales growth and has that been consistent? In many cases, we see that while the overall number is growing, there is no specific product line that is gaining leadership on the ground. In many cases, there is other income that inflates the sales. Not the growth you’re looking for.
While it may be hard for retail investors to explore fine print and accounting changes in annexures, I’m sure the above pointers will address broad valuations parameters for most IPOs. And if the answers to the above are not very clear in the DRHP, think for a moment — Why has the company filled so many pages? Don’t reward a thick answer sheet.
If you don’t understand what you buy, you’re just buying another Tulip flower hoping that someone else will pay even more for that. It works for a while until it doesn’t.
The author is Managing Partner Ansid Capital, a limited partnership hedge fund. He tweets at @anuragsingh_as and is an ardent follower of the value investing school. Views expressed are personal
(Edited by : Ajay Vaishnav)
First Published: IST