How to read an IPO prospectus

Initial Public Offers are queuing up to hit markets, clamouring for your attention as multiple offers open together many a time. Here, the Red Herring Prospectus (RHP) will come in handy to evaluate IPOs or at least understand the company. Given its intimidating bulk, here's guiding you through reading the prospectus.

Basics

To begin with, download the prospectus of the companies you want to look up from the SEBI website: http://www.sebi.gov.in/Index.jsp?contentDisp=Section&sec_id=5

A prospectus is divided into nine sections. In order, from Section I to Section IX, these are: general details, risk factors, introduction to the industry, business and offer details, in-depth information about the company and history, financial details, legal details, other offer information, main provisions of the articles of association and finally, miscellaneous information. To make trawling through the prospectus a shade less confusing, here's two points: one, you need really concentrate on certain sections only and two, don't read the prospectus in order.

Reading the document

Start with the section called ‘About Us', the fourth section. It contains details about what the company does, the industry in operates in and the prospects of both. It also contains the history of the company, its management and group and associate companies. A thorough read is a must.

Then flip back to the start and read ‘Risk Factors', the second section. This way you will be able to better understand risks and their judge their impact on the company. Move on to the third section and read the parts which contain the terms of the offer and objects of the offer in detail. Understand why the company is raising money, whether any private equity investors or promoters are exiting the company (the entire issue proceeds will not accrue to the company in this case). You can also glance at the capital structure and the capital history that falls in this section to check whether big private investors have invested in the company, if so, when and at what price. You will also get an indicative market capitalisation post listing.

At this point, you have a clear picture of the industry the company operates in, its revenue model, risks to business and uses to which the money raised will be put. Next go on to the financials, to check if all business potential has translated into numbers. ‘Financial information' forms the fifth section of the prospectus. Here, both standalone and consolidated (if applicable) profit & loss statements, balance sheet, cash flow, break up of debt and other key financial details are provided. Comb through these to know how profitable the company is, whether profitability has been improving, effect on leverage as a result of the issue and so on. You can, if you wish, analyse financials before risks and issue objects also.

Finally, thumb through the part on outstanding litigations contained in the sixth section - ‘Legal and other information'. More often than not, main litigations that have a heavy bearing will be mentioned in the risks. However, some sectors such as real estate could be facing a whole lot of litigations, so do spare a glance. If you still have the time and inclination, glance through the sections left. Annexure usually contain the IPO grading report.

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