IPO Analysis

1. "Read the offer document carefully" is a joke! It's a document with more than 100 pages.
2. Focus on what's important. The game is anyways stacked against you (in most cases).
1. Key Risk which the business & industry faces - it's easy to miss this segment in a bull market when IPO "promise" listing gains.
2. Some risk are meaningful - incurred losses, the debt level, etc.. - avoid buying business that carry big risk.
3. You can get good insights about the business if you dig deep and read.
4. Understanding the industry - it is equally important as understanding the business.
1. Market Overview - Statistic \ Market Structure \ Market Size
5. Understand the business 
1. When it start operate?
2. Who is the customer?
3. What's the target segment?
6. Key Shareholding info prior to the IPO
7. How the company use the IPO money? How many years it will take to spend IPO money?
1. Business Growth Related
2. Balance Sheet Related  (e.g. repayment of pass debt) 
8. Basic of issue price - often, there is no basis for the offer price, but they still have to mention something.
9. The management - people who run the show
10. Financial Statement
1. Read the balance sheet as you would do of any listed company, except Equity & Borrowings when the company will be repaying part of its borrowings using the money raised through the IPO
2. Calculate the key ratios like D/E, current ratio, Receivables Days, Inventory Days, Payables Days, Cash Conversion Cycle, etc and compare with a listed peer.
3. Income Statement - calculate key ratios like sales growth, gross margins, pbt growth & margins, interest coverage, net profit growth & margin... and compare it with a listed peer
4. Cash Flow Statement - check if company is generating cash from operations. OCF/Sales can be a useful ratio to compare with a listed peer.
3. Other key note
1. The "base rate" of making money (even in the long run) is low, so be very careful and understand clearly if the business is worth buying into.
2. Most IPOs are high on propaganda. Avoid that and focus on the important info about the business that lies inside the IPO document.
3. Ask
1. Why is the company raising money? Is it to fund future growth, pay off past loans, or to give exit to other investors?
2. If the business is incurring losses, how does the management plans to make it profitable in the future (and if profit is really part of the plan)?
3. In the absense of profits, how would you justify the IPO price? How does it look on P/B value vis-a-vis its listed peers?
4. How does the company stack against is listed peers (if any)?
5. What's been the management's track record and promoter's history?
6. Is the promoter also involved in other related / unrelated business? If yes, why?
7. Does the company really have growth potential and/or competitive advantage against peer as the IPO document may suggest?
8. Does the management have a good capital allocation record, and how prudent have they been on this front?
9. Do you understand the business and its potential after reading the IPO document, or are you suffering from "Oh, it's an IPO!" syndrome?
10. If this was as already listed business and everything else remains same - like financial performance - would you buy?

And, what's the great guru says about an IPO?

[An] intelligent investor in common stocks will do better in the secondary market than he will do buying new issues…[IPO] market is ruled by controlling stockholders and corporations, who can usually select the timing of offerings or, if the market looks unfavourable, can avoid an offering altogether. Understandably, these sellers are not going to offer any bargains, either by way of public offering or in a negotiated transaction. - Warren Buffett

An IPO is like a negotiated transaction – the seller chooses when to come public – and it’s unlikely to be a time that’s favorable to you. So, by scanning 100 IPOs, you’re way less likely to find anything interesting than scanning an average group of 100 stocks. - Warren Buffett

It’s almost a mathematical impossibility to imagine that, out of the thousands of things for sale on a given day, the most attractively priced is the one being sold by a knowledgeable seller (company insiders) to a less-knowledgeable buyer (investors). - Warren Buffett 

Our one recommendation is that all investors should be wary of new issues—which means, simply, that these should be subjected to careful examination and unusually severe tests before they are purchased. There are two reasons for this double caveat. The first is that new issues[IPO] have special salesmanship behind them, which calls therefore for a special degree of sales resistance. The second is that most new issues are sold under “favorable market conditions”—which means favorable for the seller and consequently less favorable for the buyer. - Benjamin Graham

It is entirely possible that you could use our mental models to find good IPOs to buy. There are countless IPOs every year, and I’m sure that there are a few cinches that you could jump on. But the average person is going to get creamed. So if you’re talented, good luck. - Charlie Munger

It’s safe to conclude that IPOs, which seem like a good investment vehicle are, in reality, not so. In fact an IPO is a product which is against investor interest, as it is mostly offered to investors when they are willing to pay a higher and outrageous valuation in boom times. - Parag Parikh

Any kind of rational comparison of long-term returns in the IPO market and the secondary market would show that investors do far better in the latter than in the former…IPOs are one of the surest way of losing money in the long run.

Four characteristics of the IPO market makes it a market where it is far more profitable to be a seller than to be a buyer. First, in the IPO market, there are many buyers and a only a handful of sellers. Second, the sellers, being insiders, always know more about the company whose shares are to be sold, than the buyers. Third, the sellers hold an extremely valuable option of deciding the timing of the sale. Naturally, they would choose to sell only when they get high prices for the shares. Finally, the quantity of shares being offered is flexible and can be “managed” by the merchant bankers to attain the optimum price from the sellers’ viewpoint.

But, what is “optimum” from the sellers’ viewpoint is not the “optimum” from the buyers’ viewpoint. This is an important point to note: Companies want to raise capital at the lowest possible cost, which from their viewpoint means issuance of shares at high prices. That is why bull markets are always accompanied by an surge in the issuance of shares. - Prof. Sanjay Bakshi

References:-

• 5 Big Questions on IPOs…Answered, VISHAL KHANDELWAL
• IP-Oh! Document Analysis, VISHAL KHANDELWAL