When Ashok Soota founded Happiest Minds Technologies nine years ago, he believed it to be the strongest start-up team for an IT services company. Today, with the IPO (initial public offering) being oversubscribed a whopping 150 times, we know that investors, too, feel the same.

In astonishing contrast, when Infosys, led by some of the most brilliant minds of the country, went public in 1993, it was undersubscribed, and was bailed out by Morgan Stanley. Despite this uninspiring debut on the stock exchange, a ₹10,000 investment made in the Infosys IPO back then, is now worth ₹7 crore!

So, can an IPO make you rich?

It most certainly can, but not always. There are a host of stories about companies not doing as well as one would expect, leading to an erosion of wealth.

One such story is of Reliance Power, whose IPO came out in 2008. But all too quickly, this Anil Ambani led company proved that relying solely on the brand name, and the promise of the energy sector, wasn’t enough to sustain good performance. Today, one share of Reliance Power is worth 98% less than its initial price.

Another story is of Coal India. Today, this company is still valued at about the same level as it was nine years ago. However, investors receive a higher than average annual dividend. While this dividend doesn’t entirely compensate for the company’s under-performance, it does aid in retaining some faithful investors.

These are just two of the many companies that have languished over the years, soon after their first public issue. And this begs the question – how does one decide which IPO to invest in and which one to pass up? Figuring out whether a company could make our money grow is both an art and a science, but it definitely isn’t rocket science.

Let’s take a look at a few simple parameters that help gauge the viability of an IPO.

The first factor is to do with purpose.

I vividly recall the first IPO that I was truly excited to invest in over a decade ago – Jubilant FoodWorks, the company that owns the Domino’s Pizza and Dunkin Donuts franchise. But simply because we all love pizza isn’t a good enough basis.

Just as I would ask myself why I want to invest in a company, I must ask why the company needs these funds. What’s the objective, and how will the funds be utilized? If a company is raising funds to pay off loans, this isn’t a good sign. If the money raised is going into research and expansion, it’s a lot more comforting. In the case of Jubilant FoodWorks it was a mix of both reasons.

Another factor is the people.

Coming back to Happiest Minds. The fact that the company is led by Ashok Soota gave investors a lot of confidence to put their money on this stock. A 78 year old, veteran entrepreneur in the IT industry, Soota had previously co-founded Mindtree, and had also served as Vice Chairman of Wipro. It’s important to understand the people that make up a company. They’re the ones responsible for taking the company forward. Although Soota’s age might seem like an area of concern, the strong team and work culture they’re building is a huge plus point.

But purpose and people aren’t the only factors, there are others as well. I’ll go over some of them in brief here:

  • Is the company dependent solely on a few big clients?
  • Does the company have good repeat business?
  • Who are the competitors? Can these competitors easily replicate the company’s offerings?
  • Has the revenue and profit been growing steadily over the years?
  • How much debt does the company have? And has the debt portion been increasing or decreasing over the years? If it’s the former, take that as a warning sign.
  • Will the promoters hold a substantial portion of the company, at least 25% of the shares, even after listing? A higher percentage ensures the founding members remain interested in the performance of the company.
  • Is the company overvaluing or undervaluing its shares? You can find this out with the PE Ratio (Price Earnings Ratio) – the offer price divided by how much profit the company earned per share. Compare this with the industry standard, and be wary of a ratio higher than 25. It is usually an indicator of overvaluation.

All this information is available in something known as the Red Herring Prospectus – a document that companies file with the Registrar of Companies, and make available for investors at least three days before the IPO opens. If one is really keen on subscribing for the shares, doing this basic research is a must. It isn’t wise to rely entirely on media hype or third party advice. Moreover, equipping yourself with knowledge of the company you want to put your money in, makes the whole process much more satisfying.

Around the World

While one of India’s most revered business tycoons, Dhirubhai Ambani, has been widely known for initiating the IPO culture in India, another business tycoon on the other side of the world thinks a bit differently.

Billionaire investor, Warren Buffett, never buys shares in an IPO. In an interview with CNBC shortly after the Uber IPO, he put it very simply.

He said that you must be able to take a sheet of paper and, “if you’re buying Berkshire, you must be able to say – ‘I am buying Berkshire Hathaway at (its valuation of ) 500 billion dollars, because…’ You can’t say I’m buying it because my neighbour thinks it’s going to go up. Or because everybody’s talking about it on CNBC this morning. When you buy groceries or something else, you can answer that question. But if you can’t answer it on something that you’re involving your savings of many years for, why should you be doing it?”

Upcoming IPOs

An IPO can make you rich, but only if you do the necessary research, and avoid the lure of speculative gains. There are a number of IPOs around the corner. From Route Mobile that ends today, and others in the pipeline – LIC, Burger King, and Zomato, to name a few. If you plan to invest in any of them, read up about the company, do a SWOT analysis, weigh the pros and cons, and only go for it if you’re totally convinced it’s worth investing in.

It remains to be seen how Happiest Minds will perform on its listing day that’s set for September 17, and thereafter, but this team of Happiness Evangelists sure look like they’ll make their investors happy, and rich.

Author Bio - Komal Shivdasani

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