How to Invest in good IPOs [A step by step process]

Summary

The video script discusses the results of a poll that led to a decision to create content on Initial Public Offerings (IPOs). It outlines a comprehensive framework for analyzing the risk and potential of investing in IPOs, emphasizing the importance of understanding the market situation, the company's business model, its profitability, and competitive advantage. The script warns against overhyped IPOs and advises on assessing valuations, identifying red flags, and considering tailwind factors. It stresses the need for investors to form their own investment thesis based on thorough research and understanding.

Takeaways

• 📊 The video is a response to a poll asking if the community wanted content on riskier investment topics like Futures and Options, microcap investing, and IPOs, with 76% voting in favor.
• 🎥 The creator emphasizes that the video is for educational purposes on analyzing IPOs, not for stock recommendations.
• 🤔 The video discusses the importance of understanding the market situation and the hype surrounding an IPO before investing.
• 💡 It is crucial to have a clear understanding of a company's business model and how it makes money before considering an IPO investment.
• 📈 The video mentions that profitable companies with a high Return on Capital Employed (ROCE) are generally more attractive for investment.
• 🏰 Identifying a company's 'moat' or competitive advantage is a key factor in evaluating the potential success of an IPO.
• 💰 The price at which the IPO is offered is critical, and comparing the company's PE ratio to the industry average can provide insights into its valuation.
• 🚩 The video warns of red flags such as an IPO being primarily an 'offer for sale' where existing stakeholders are exiting without new major investors.
• 💨 Tailwind factors, such as supportive industry trends or government policies, can positively influence a newly listed company's growth and stock price.
• 👔 The quality of management is important, and researching the background and past performance of key executives can provide clues about their ability to lead the company successfully.
• 📚 The script encourages viewers to apply the provided framework to their own investment style and to do their own research rather than blindly following others' advice.

Q & A

What was the main topic of the video?

The main topic of the video was about IPO investing, including a risk mitigation framework on how to analyze an IPO properly.

What was the result of the poll conducted by the speaker on their YouTube community?

The poll asked whether the community wanted the speaker to cover riskier topics like Futures and Options, microcap investing, and IPOs. An overwhelming majority, 76% of approximately 21,000 voters, voted yes.

Why did the speaker decide to make a video on IPO investing?

The speaker decided to make a video on IPO investing because the majority of their community expressed interest in learning about riskier investment topics, particularly IPOs.

What is the first key point the speaker suggests to consider when analyzing an IPO?

The first key point is to consider the market situation and the hype around the IPO at the time of its launch.

Why is it important to understand the business model of a company before investing in its IPO?

It is important to understand the business model to have a clear idea of how the company makes money and to assess its potential for growth and profitability.

What does the speaker mean by 'MOAT' when analyzing an IPO?

MOAT stands for 'competitive winning advantage', which refers to the unique strengths or advantages that a company has over its competitors.

How does the speaker suggest determining if an IPO is overvalued or undervalued?

The speaker suggests checking the company's PE (Price to Earnings) ratio and comparing it with the industry PE ratio to assess if the IPO is overvalued or undervalued.

What are 'red flags' in the context of an IPO, as mentioned by the speaker?

Red flags refer to potential warning signs such as existing stakeholders selling their shares (offer for sale) without new significant investors coming in, or the company using the IPO funds for reasons that don't align with its growth strategy.

What is the significance of 'tailwinds' in the context of an IPO?

Tailwinds refer to external factors or trends that could positively influence the growth of the company or the performance of its stock after the IPO.

How does the speaker suggest evaluating the quality of management in an IPO company?

The speaker suggests researching the background and past work of the management team, particularly looking at the experience and success of key executives in their previous roles.

What is the final advice the speaker gives regarding applying the IPO analysis framework?

The speaker advises that investors should understand the framework, adapt it to their own investing style, and make their own informed decisions rather than blindly following others' recommendations.

Outlines

00:00

📈 Introduction to Risky Investment Topics

The video script begins with the host addressing the audience and sharing the results of a poll conducted within their YouTube community. The majority voted in favor of exploring riskier investment topics, such as futures and options, microcap, smallcap, midcap investing, and IPOs. The host clarifies that the video will not be about stock recommendations but will instead focus on a risk mitigation framework for analyzing IPOs. They emphasize the importance of learning and understanding the investment process rather than seeking direct stock picks. The host also mentions their own experience with microcaps and IPOs and sets the stage for a series of videos on higher-risk investment instruments.

05:05

🔍 Analyzing the Business Model and IPO Hype

The second paragraph delves into the importance of understanding a company's business model and how it generates revenue before investing in its IPO. The host warns against investing in companies with unclear business models and emphasizes the need to have a sense of the company's future direction and profitability. They provide examples of companies like Geo Finance and discuss the significance of the market situation and hype surrounding an IPO at the time of its launch. The host suggests using Google to gauge the level of hype and to study the company's financials and business operations, including its products and use of technology, to form a clear picture of its potential for success.

10:06

🏰 Identifying the Company's Competitive Advantage and Valuation

In this paragraph, the host discusses the concept of a 'moat' or a company's competitive advantage, which is crucial for long-term success. They highlight the difficulty of identifying a moat in an IPO and suggest looking at the company's financial performance, return on capital employed (ROC), and its use of technology as potential indicators. The host also emphasizes the importance of the IPO's valuation, advising viewers to compare the company's price-to-earnings (PE) ratio with industry averages to assess whether the IPO is overvalued or undervalued. They provide a method to evaluate the company's financial data and to understand the purpose of the IPO, whether it is for a fresh issue or an offer for sale, and the intentions behind it.

15:07

🌪️ Considering Market Tailwinds and Management Quality

The final paragraph focuses on identifying market tailwinds that could positively impact the company's growth post-IPO and the importance of assessing the quality of the company's management. The host suggests looking for supporting factors such as government policies or sector growth that could benefit the company. They also stress the importance of researching the management team's background and experience, as this can significantly influence the company's performance. The host concludes by encouraging viewers to apply the provided framework to their own investment decisions and to develop their own investment thesis based on a thorough analysis of each IPO.

Keywords

💡IPO

An IPO, or Initial Public Offering, is the first sale of stock by a company to the public. It marks the company's transition from private to public ownership and is a critical event for investors as it provides an entry point into the company's equity. In the video, the speaker discusses analyzing various IPOs, emphasizing the importance of understanding the company's financials and market conditions before investing in an IPO.

💡Risk Mitigation

Risk mitigation refers to the process of identifying potential risks and taking steps to reduce their likelihood or impact. In the context of the video, the speaker outlines a framework for analyzing an IPO to mitigate investment risks, highlighting the need for thorough research and understanding of the company's business model and financial health.

💡Microcap Investing

Microcap investing involves investing in companies with a very small market capitalization, typically less than $300 million. These stocks are considered high-risk due to their lack of liquidity and financial stability. The video script mentions microcap investing as one of the riskier topics voted for by the community, indicating the speaker's willingness to cover high-risk investment strategies.

💡Futures and Options (F&O)

Futures and options are types of financial derivatives that provide investors with the opportunity to speculate on the future price movements of an underlying asset. They are considered higher risk due to their leveraged nature. The video script suggests that the community is interested in learning about these complex and riskier investment instruments.

💡Smallcap and Midcap

Smallcap and midcap refer to companies with a market capitalization that falls between microcap and large-cap stocks. Smallcap stocks are generally considered riskier due to their smaller size and less liquidity, while midcap stocks are somewhat more stable. The script indicates that the community is interested in these investment categories, which are part of the higher-risk investment spectrum.

💡Market Hyped IPO

A market hyped IPO refers to an initial public offering that has generated significant excitement or speculation in the market, often leading to high demand and potentially inflated prices. The video discusses the importance of evaluating the hype around an IPO, cautioning that overhyped IPOs may not perform as expected post-listing.

💡Business Model

A business model describes the rationale of how a company creates, delivers, and captures value. In the video, the speaker stresses the importance of understanding a company's business model when considering an investment in its IPO, as it provides insight into how the company intends to generate revenue and profits.

💡Return on Capital Employed (ROCE)

ROCE is a financial metric that measures the profitability of a business in relation to the capital invested in it. A high ROCE indicates that a company is efficiently using its capital to generate profits. The video script uses ROCE as an example of a financial metric investors should consider when evaluating the financial health of a company going public.

💡Moat

In investing, a 'moat' refers to a sustainable competitive advantage that protects a company from competitors. The term is borrowed from the concept of a castle's moat, which provides defense. In the video, the speaker discusses the importance of identifying a company's moat when analyzing an IPO, as it can indicate the company's potential for long-term success.

💡PE Ratio

The PE ratio, or price-to-earnings ratio, is a valuation ratio calculated by dividing a company's market capitalization by its earnings. It is used to determine if a stock is overvalued or undervalued relative to its earnings. The video script mentions the PE ratio as a tool for assessing the valuation of an IPO and comparing it with industry averages.

💡Red Flags

In the context of investing, red flags are warning signs that indicate potential problems or risks associated with an investment. The video script warns viewers to look for red flags in an IPO, such as unusual management practices or suspicious financial activities, as these could signal underlying issues with the company.

💡Offer for Sale

An offer for sale in an IPO context refers to the portion of the offering where existing shareholders sell their shares to the public. This is different from a fresh issue, where the company itself is issuing new shares. The video script advises investors to be cautious of IPOs that are primarily offers for sale, as they may indicate that existing stakeholders are looking to exit their positions.

💡Tailwind

In investing, a tailwind refers to external factors or trends that positively influence a company's performance or stock price. The video script mentions looking for tailwinds when analyzing an IPO, such as supportive industry trends or government policies that could boost the company's growth prospects.

💡Quality of Management

The quality of management refers to the competence, experience, and integrity of a company's leadership team. In the video, the speaker suggests that assessing the quality of management is an important part of evaluating an IPO, as capable leadership can significantly influence the success of a company post-IPO.

Highlights

The video is a response to a community poll, where 76% voted in favor of discussing riskier investment topics like IPOs, Futures & Options, and microcap investing.

The speaker will provide a risk mitigation framework for analyzing an IPO, clarifying that it is not a stock recommendation.

The video emphasizes the importance of not seeking stock recommendations but learning how to invest, especially in high-risk areas like microcaps and IPOs.

The potential for high returns in IPO investing is illustrated with the example of Mrs. Becter IPO, which saw significant gains within a couple of years.

Investors are cautioned about the thrilling yet risky nature of IPOs, and the need for thorough research before investing.

The video outlines the process of researching an IPO, including the use of tools and techniques, and keeping key points in mind.

The importance of understanding the market situation and the hype around an IPO at the time of its launch is discussed.

The video explains how to assess the business model of a company going public and the need for clarity on how the company makes money.

Examples are given to illustrate the impact of a company's financial performance and the importance of a clear business strategy post-IPO.

The concept of a company's 'moat' or competitive advantage is introduced as a critical factor in evaluating an IPO's potential.

The video details how to determine if an IPO is overvalued or undervalued by comparing its PE ratio with the industry standard.

Red flags to watch for in an IPO, such as offer for sale by major stakeholders or lack of fresh issue, are explained.

The role of 'tailwinds' or external factors that could positively influence an IPO's performance is discussed.

Assessing the quality of management and their past performance is highlighted as a key step in evaluating an IPO.

The video concludes by encouraging viewers to apply the provided framework to their investment style and make informed decisions.

A promise to write a post on microcap investing with more details for the community is made, showing the speaker's commitment to education.

Transcripts

Hi, everyone. Welcome to today's video.

So recently, I did a poll on my YouTube

member community, and I asked the community that should I be making riskier

topics like Futures and Options, microcap investing, smallcap midcap

investing, IPOs, and overwhelming majority voted yes.

76% people said yes.

Approximately 21,000 votes as I'm seeing as of now.

So this.

So in that spirit, today, I will make a video on IPO investing.

I will take you through an entire risk

mitigation framework on how to analyze an IPO properly.

This is not a stock recommendation video. .

Half of the people who watch the videos are just here for stock recommendation.

Please don't behave in that way.

Please learn how to.

Do I invest in microcaps? Yes, I do.

I Why IPOs do I buy?

Seldomely, if the IPO is good, I will buy.

Why does it make sense to invest in IPO or

invest in microcaps or do F&O, all this stuff?

So today we are going to cover the story of IPOs, and subsequently, I will continue

this series of analyzing slightly higher risk instruments.

For example, I will show you, Mrs. Becter IPO.

Here, the company got listed at Rs.594,

and it made an high of Rs.1,327 within a couple of years.

So what are the returns.

Similarly, a lot of IPOs are there that have given multi-bigger return, so to say.

So IPO investing is rewarding.

If you have to double, triple, so it helps.

And therefore a lot of investors get attracted towards it.

Similarly, small cap, midi-cap,.

The point is that this space is very

thrilling, but it also means that it comes with risk.

On this video, I'm going to help you understand the entire IPO game, that how

do you go about researching an IPO, what are the tools, techniques that you can

use, what are some salient points that you should keep in mind.

So in that context, I'm making a video, please understand the framework.

That is the most important point.

I will take a few names here and there,

but please do not consider it as a stock buying recommendation or something.

That's a simple, humble request. And let's get started.

So first key thing is that you will naturally think,.

Here you can take a look at what are the upcoming IPOs in India this week.

So you'll see that Nova Agritech IPO is

there, RK Swami is there, Brisk Technovision is there, etc.

So you'll find all the IPOs.

Similarly, which IPOs are active? So this is a worldwide list.

You can see this as well.

In the year 2024, which are the IPOs that are about to come?

So you will see this as well.

Then you can start your preparation.

And there are seven, eight points that you need to remember.

So let me take you through all those

seven, eight points in very simple, easy to understand language.

Please like, like button, so that these

type of fundamental videos reach out to more That is the goal of making these type

of videos, that retail investors become more educated.

.

On that spirit, let us pick an IPO from here that we can possibly go and analyze.

Let's say, now these IPOs are You can go and read more about it.

You can see all this data.

Now, the issue is whenever an IPO is about

to be launched, before that, much before that.

They do something called DRHP filings with the SEBI, and all that stuff.

And you can find this entire set, entire detailed information.

So for example, if you are analyzing NoVA

Agritech, you can type out DRHP NoVA Agritech.

And then you will see this SEBI website.

You can go and check.

Now, you can go and read this 443 pages worth of report.

Now, 90% people watching this video would

not have the time to go and read this five-hour report, so to say.

What time it will take? .

Now, what are some salient points that you should find out?

Or at least these seven, eight points, you have clarity.

What are those seven, eight points?

And this is not a stock recommendation video.

This is an analysis study.

The first critical point that I will keep in mind is the market situation in which

the IPO is getting launched and how hyped the IPO is.

When a good market is going on, a lot of companies take out their IPO.

So Tata Tech, let me just quickly show you.

So IPO open, here in November, 1,300 Rs..

Now it is trading at 1,100 Rs..

So it was overhyped in an overvalued market, so to say.

So the IPO timing and the hype around it becomes extremely important.

So typically what I've seen is that see, when the IPO is launched in a good market,

I'm not saying euphoric market, I'm just saying good market.

That is a good time to invest.

In fact, up euphoria may be invest.

So from a market But the important point is that the hype

around that company should not be very high.

Because if the hype is very high, then

technically it is seen that the IPO will go down, not going to go up.

Like in the TataTech case, we are.

So let me share one or two more case studies.

So as a geo financial services, you have to look.

It was in August.

It went a little bit higher.

And then it started falling quite aggressively.

So now this sideways movement is going to be going on.

But geo finance was launched in a decent market.

That's good news.

But it was an overhyped IPO. So you have to be careful.

So for example, if we are doing, again, coming back to the company that we were

analyzing, just like Novatech Limited that we were analyzing.

Just figure out, just google Novatech IPO and see how much hype is going on in this.

That will give you a sense whether that particular IPO is overhyped or not.

This is literally step one.

Now, the second key point that you need to study about the IPO that you're

considering investing in is how does the company make money?

.

If the business model right now is not very clear to you, but you feel that the

business model will become clearer and you have a sense that how the company is going

to make money, then you could possibly consider investing in that IPO.

If you have no clue what the company is

doing, how strong the industry is, then please do not touch such a company.

Let me give you a couple of examples.

For example, if we consider geo financials.

Now, geo financials, at the time of IPO

launch, it was not clear what business the company is going to do in the future.

. But So everyone understands, Ambani ji ,

so he will be able to build some company around it.

Amc's launch, insurance business launch, etc.

So basic idea was there.

So of course, when you are investing in a

slightly newer company, not having business clarity about its current

business is okay, but you should have a sense where the business is going or where

the money is going to come from the company.

So this is an important point.

But on the flip side, if you take a look at something like.

It has been crushed into half or more than half in roughly two, two and a half years.

Why? Because this was a loss-making company.

You can see that the net losses were there.

So now you will say, in 2022, 2023, we are

getting the data because it is a listed company.

But at the time of analyzing the company at almost at the time.

All those things are happening.

So you should be careful.

If you're not sure how the company is

going to make money, and if the profit margins in that industry

is not high or the company does not have any MOAT, so.

So again, you have to go on DRHP and they

will give you some financial data around it.

And we have to assume that the financial data presented is correct.

So if you take a look at Nova Agritech,

you can see that the revenues from operations have been 160 crores in 2021.

.

It's the company profitable? Yes.

Is the ROCE high? Yes.

So it's the idea that the company is profitable.

So that's part one. Part two is that you have to understand

what the company does in order to make money.

So this may have highlights.

So Axis Bank, for example, did a coverage

of this particular company, and they have consolidated the points.

So by reading and understanding more about the business, what the business is, you

will get an idea of how the company is making money.

For example, you can see that this company has been in operation since 2007.

So try to get more data that how the financial performance of the company is.

Google market, you will get an idea.

Then what type of products does it sell?

So it sells soil health management, crop, nutrition, bio-stimulant, bio-pesticide,

pest management product, new technologies, crop protection.

.

Then you should Google further, what type of new technologies?

For example, I took a look, I studied the

company more, and they are into drone making.

And drone making, if you look at

agricultural products, they are able to monitor the crop.

So by aggregating and using more

technology, they are able to streamline operations.

So India will be in India as well.

They will consolidate all this and they

might start using drones and better

technology in order to manage monitor crops.

And then this data you will get, which products are in.

So you have a clear idea that this is an

agri-sector and they are doing end-to-end management.

So you have a clear understanding that

this company is into crop management and they are using some technology also.

Now, the next part for you, our next

homework for you is to figure out what is the moat of the company.

Now, moat means competitive winning advantage.

For example, if I ask you, moat of Zomato.

What is the moat of Zomato?

Well, it's the brand.

It has a very, very strong brand.

Now, if I ask you that what is the mode of Apple products?

Well, the mode, again, is brand because

they are able to price the product really, really high.

So that company is mode.

Zomato, you can say creative advertisement is also a mode.

So this is the way that you can see some winning advantage in any company.

So now identifying the mode of an IPO is really tough.

You need to study, but you need to have a vision, you need to have a thesis.

For example, this company, if you study, I tried to do that.

And I thought, for example, this is a crop management end-to-end company.

It is a small cap player.

And it's more this financial management as of now.

Because one of the biggest reasons why

small cap is unable to turn into mid-cap or large cap is that they are unable to

survive in the market for the next five years.

So you can see major problem.

So you can see that the last year, ROC or return on capital employed is 27%.

Now, this was fairly high.

There will be fluctuation of ROC when it comes to small companies.

But typically, a good company's ROC is more than 12%.

The reason why 12% is that because the cost of capital in India is roughly 12%.

If some company has consistently

maintained above 12%, then again, not a stock recommendation.

I am just simply picking this as an

example of a small-cap company so that I can make a point.

This is the third key thing that you

should have a very clear idea about the moat of the company.

Now, moat of the company here also seems

to be that they are into tech, they are launching better products, as a drone,.

There will be a lot of cross-collaboration or cross-selling.

.

There is a lot of cross-selling opportunity when it comes to this company.

Now, the fourth point is at what price you are getting that IPO.

Now, this is a very, very important aspect of IPO because many of the IPOs in the

past have been launched at crazy valuation.

And if you are buying something at crazy

prices, you're never going to make money in it.

So how can you check?

Number one, you can check the PE ratio of the company, and you can check the PE

ratio of that For example, if the company's PE is 25 and the

company's PE is, let's say, 10, then the company is likely to be

undervalued as long as it is depicting growth.

That is one assessment of this situation.

So that is what I have googled and this is what I've

been able to find, that the PE ratio of Zomato at the time of IPO launch, you'll

be able to find that the PE ratio of the company is 12.5,

industry PE is 25.64. And agricultural, this is a sensible data.

.

For example, many times, there are a lot

of foreign companies that underwrite the Indian IPO, and then they just

blow it out of proportion thats the the important assessment.

Can you 100% validate that this is the right price of the IPO?

You cannot.

There is a degree of risk that you are taking, and.

That is the correct set of expectations to have.

The next point that you need to decipher is that are there any apparent red flags?

Now, red flags, that means you can see that there is not a problem, that

promoters are bad or some funny game is happening, that they are bringing this IPO

just so that existing investors can find an exit.

So for that, you have to understand the concept and.

Offer for sale versus fresh security issue or fresh issue.

Now, offer for sale means that the

existing set of stakeholders in the company, from the moment it is going from

private to public,, that a privately listed company is now becoming public.

So that process is called as an IPO process.

.

Now, if they are selling their own stick,

then that process is called as offer for sale.

That existing shareholders are selling their stick.

Fresh issue means that more equity is being added to the entire company.

You can read the technical definition.

Now, it is very important to go and read why the company is issuing the IPO.

Is it for offer for sale or is it for fresh issue?

And What are they going to do with the money?

.

You can go and read it.

You can go and read that 450-page document that I was speaking about.

And you would have to pick this information and make a sense.

Additionally, other red flags would be offer for sale, but the big stakeholders,

they are exiting, and no other big stakeholders are buying.

So I'm going to show you how many stocks are buying.

These are anchored investors.

How many stocks are buying? .

You can see that almost 2.25 is QIB plus

HNI and retail is 1.22. So it's like 66% and 33%.

So it's not an ultra-ratio.

70, 80% is being bought by small players

and only big players are buying 30% of whatever the new equity is coming.

Next point that you need to understand is the concept of tailwind.

So tailwind means, for example, IPO, IR.

So now that company has been recently listed.

Now, are there any supporting factors that

will push the stock price or push the growth of the company fast?

Because once it gets public trust, then it's got PE expansion.

So you should look at tailwind factor.

For example, budget.

And usually, it's agriculture sector,.

It might happen that these type of companies might do well.

Now that is a news-based play.

On top of this, there can be additional tailwinds.

For example, genuinely, growth in the agricultural sector in India.

Credit disbursement in agricultural sector is high.

So you have to identify this factors given the core business of the company.

So whichever IPO you're looking to analyze, look at these type of tailwinds.

Then comes the next point, which you have to look at the quality of management.

There is no way that you can figure out or

you and I can figure out that whether the existing management is good or bad.

You can just do an assessment.

I would rather do what I will simply do is that I will look at the name of managing

director, partners, just go and Google their past work.

For example, Mr. Vaidyanathan.

Who runs IDFC First Bank.

He was able to grow IDFC First Bank really, really fast.

Why? One of the core reasons was that he

actually was an architect in terms of building the ICI-CI bank also.

So he had relevant experience in that particular industry,

and he used that experience to grow the bank that he's currently now leading.

So if you get this leadership in an IPO,

then probably your chances of success in that IPO is fairly high.

So similarly, you can do analysis.

Again, you can DRHP,

entire IPO investing or investing in this particular IPO or investing in some other

IPO, it really comes down to your investment style and investment thesis.

Just because I'm speaking about it or some other person is speaking about some stock

does not mean that you go and buy that stock.

Again, this entire framework, I hope that

you will note it down, that what are the steps involved?

You will take every IPO that you are looking to invest in, take that through

that lens and then make your decision of buying or not buying that.

This is a framework explanation.

This is a framework that I use.

Now, if you feel, you know what?

This framework is good enough for me.

I can go and change it a little bit and apply it to my investing style.

Definitely go and do that.

I would encourage you to do that.

You should understand different contrarian

viewpoints about a particular topic and then reach your own conclusion.

That is extremely important.

That is called as doing, fundamental style of investing.

I teach this on my YouTube member community also.

In case you guys are interested, I will

write a post on microcap investing tomorrow.

I will explain you more details about what microcap investing is, give you

fundamental knowledge around it so that that is the entire goal of me teaching.

I hope that you enjoyed this video.

If you did, do press the like button and I will see you soon.