InvestorQ : Are there are conditions when I should avoid applying for an IPO?
NISHA Nayak made post

Are there are conditions when I should avoid applying for an IPO?

3 years ago

This is more like a negative list or a caution list when applying in a good IPO. But there are a few basic cautions or red flags that investors must watch out before investing in an IPO. Here are a few of them enumerated…If you find that IPO valuation too steep when compared to other peers in the industry, you can choose to avoid investing in the IPO. Look at the end use of funds. Ensure the company is raising funds for activities like capital expansion, buying out companies, expansion, diversification etc. Repayment of high cost loans is also understandable.

Avoid IPOs where chunk of the funds is going towards buying property or land. These are not productive assets and the company will have a problem generating ROE on the funds raised.

Avoid an IPO if the profit track record of the company is too erratic. Typically, solid growth stories will show steady profits. Erratically profitable companies are rarely good investment ideas.

Check out the track record of the promoters. Have they floated IPOs in the past? If so, check the price performance of the stocks post-listing. If you are not satisfied you can avoid the IPO.

Also check the pedigree of the merchant bankers. Pedigreed merchant bankers are not too keen to take up issues that are not backed by solid promoters since they have their own reputation at stake.

This is a solid test of whether to invest in the IPO or not.