so the ipo season is back in everyone including the cha-cha and tauji want to buy some ipo why because they like the logo they like the business or they think they'll exit as soon as the market lists but guys i know people will continue to do that the right thing would be that you actually read the draft red herring prospectus but i know no one will do that either so we thought why don't we come up with a simple five point guide that you can follow every time you want to invest in ipo before we start with the guide do something very quickly comment right now learn up videos are good because this will give us an idea of what you think of what we're doing so far and also push the video to more people the next time you want to analyze an ipo open this video use it as a reference and go through the five points step by step it will surely make your life easier [Music] so the first thing you need to do is when a company files for an ipo they publish a document everything about their company from the opportunities and the risks now this follows a particular format this document is called the draft red herring prospectus and here's how you can download it first you go to cebi.gov.in on this home page go to filings public issue draft rhp that's the red herring prospectus with sebby and then you'll get a list of prospectuses of these companies you want to analyze so the drhp is a standard document which means it has the same format no matter what company goes ipo so whether you're investing a banking company or an insurance company or an fmcg company they all follow the same format so let's look at the landing page this is when you open the document you'll see the name of the promoters right here and the amount that they want to raise this will also tell you what's the fresh issue and also what's the offer for sale by existing investors i got a lot of comments in the zomato info edge video that info edge is selling its stake in zomato when it lists and this is seen as a bad thing guys this is not a bad thing existing investors do exit some portion in an ipo event because they want returns as well they're investors just like you but if a promoter dilutes a very large portion of his investment that is definitely a red flag a small portion is completely fine also notice one thing that the price of the shares offered is not in the document that is only available two days before the actual ipo below that we have the table of contents so let's identify the five points on our checklist you can simply click on the required heading and the document will go directly there the first thing is the objects of the offer this area talks about the utilization of funds which means that the company that is raising the money what is it going to use for abhi here i have an example of the zomato drhp and it shows that most of it is going for funding organic growth now generally when funding is done for growth that's a good thing if too much money is used to repay debts that's generally not seen as a good thing the second part of the checklist is the about our company section you know let me ask you a question imagine a stranger walked up to you asking you for money would you really give it to him if you would you can comment and i'll be contacting you soon but most of us won't really give the money the drhp is the same thing it explains about the background of the company and its financials so what are the things you should see in this section the industry overview the our business section and the profit loss and balance sheet is the most important let's understand them one by one so the industry overview is about the industry the company sits within so it talks about the market size of the industry it talks about the potential growth of the industry at this point you should try to find holes maybe the potential growth is exaggerated here key industry parameters specific to the industry so you know how to judge how growth will happen in the industry now if you take the case of zomato you can expect that zomato would grow in the case of food delivery market itself grows and the food delivery market is its industry then we have the our business section this is pretty self-explanatory it talks about what the company does how it operates the segments it operates in etc etc you should basically read the first para because it has the major business segments and it should tell you about what the company does so spend some time here as well then we'll get to the financial information section uh basically the pll and other financial statements here you'll normally get the last three years and quarterly results of the company you'll see that a few things can't be missed first is the debt to equity ratio what is the borrowings what is the debt then is the sales growth in the last three years ideally this should be moving up the operating margins are the operating margins increasing or not finally the interest coverage ratio this is basically the ebitda divide by interest it should ideally be more than 2x and then the roc should be at least 15 if what i just said didn't make any sense visit this course we have on learn app on financial ratios and financial statement analysis the first lessons are free so do check them out but this is something every investor absolutely needs to know the third part of your checklist is the management this is obviously the turbine the fuel that actually pushes the company forward you should know who the board of directors are who the management team is their experience and their enumeration i can also see here in the zumato example that sanjeev bikshandhani is here who's a non-executive director of somato he's also part of a host of other companies like info edge that owns nokri jeevan sati etc etc etc so this is a good way to know how well experienced the management is and where all they're connected to the other section over here is the legal and other information now this is important because you don't want a lot of legal cases against this company so that's one check you should definitely do you don't want a large case by the government against the company say a large tax matter which could become a future liability for example then you have the capital structure i'm sure you're interested to know what investors got in when at what price what return they got etc etc and also what particular person was allotted how many shares this is all revealed in the capital structure segment the fourth part of the checklist is valuation now i know this is difficult to do here's a quick way to know whether it's fairly priced or not and this is by comparing the p e ratio of all the peer industry versus the ipo but there's a small problem generally getting the p e ratio is very difficult a lot of people don't include it in the rhp so i'll just tell you how you can calculate it so ready [Applause] [Music] i will do this with an example of doddler dairy i hope that's how it's pronounced uh it's ipo came out recently and we can see that the price was declared two days before the ipo and the price of the company was fixed at 428 rupees so let's see how we can calculate the p e ratio the first thing we need is the earnings per share so step one you calculate the post issue number of shares this is the total number of shares after the issue the way to do that is to calculate the pre-ipo total number shares you can get this from the capital structure section in this case it's 5.83 crores then you add the number of fresh issue shares because new shares were also issued that is the ipo right which means in this case it's 11 lakh shares or 0.11 crore shares which means the total number of shares post issue is 5.95 share now we need to calculate the eps all we need to do is take the profit after tax which is 149.6 crores divided by the total number of shares which is 5.95 crores to give us an eps of 25.14 per share the final step to get the p e ratio is to divide the price of the issue which is 428 divided by 25.14 to give us 17 x 17 is your p e ratio now all you need to do is compare this number to all the other peers you generally have this information available on the internet just google it and in this case we can see that doddler dairy is fairly priced because every other dairy company is much much higher so hope you can use this to judge evaluation next time you're trying to understand the ipo the last part of your checklist is understanding the risks every business has risks and you need to understand whether you think these risks are likely to happen or not basically you don't want the risk of ruin to happen basically a risk of ruin is when an event happens and takes the business to completely zero of course this is possible one example is in the gower drhp there is mentioned that goer is unable to pay back its creditors and the creditors have filed for a legal case now this is a potential risk for go as a company even traders have a stop loss you should also have a mental stop-loss on this one single company so the risks explains the risk of the company the market forces and of course the industry make sure you understand what the risks are so you as an investor don't get surprised when the industry changes i hope you found this guide useful but i know even after a guide there'll be very specific questions to an ipo to a company to a sector and this is why at learnapp we have workshops and live classes happening every single weekend think of it as your coach which is going to apply all those concepts you've learned in the courses using live market data to understand interpret and analyze what you can do as an investor so if you're interested to apply your learning to the market now check out the live classes we have on learnup.com every single weekend i think you really like them if not we have some awesome videos on our youtube channel right here check this one out and check this one out i'm sure you'll like it we are working 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