An offer document is only as good as the disclosures a company chooses to make.
Burnt your fingers in recent IPOs? While you cannot do much to change market sentiment, which is unpredictable, you can take greater care while investing in IPOs by reading the fine-print.
A big, fat offer document can be overwhelming. But you can quickly leaf through it and focus on some of the essential sections. The must-read sections are as follows:
Risk factors: This is the first section in the offer document. Reading through the entire section might be a little disconcerting and your first instinct might be to avoid the offer altogether. It is the duty of the company to disclose all conceivable risks to performance. However, try and focus on the ones that are specific to the company (client concentration, legal disputes, heavy indebtedness, exposure to risky revenue streams) rather than general risks that affect all companies in the industry or the country (disasters, terrorist attacks, slowdown in economy).
Objects of the issue: This section explains how the proceeds of the offer will be deployed. A detailed break-up of the expenses and an implementation schedule is usually provided. Reading this section will help you determine if your money will be invested in projects that will deliver higher returns than what the company is currently able to achieve. It will also tell you when these projects will begin to pay off. For instance, if newly expanded capacities are likely to come on stream two years from now, you would have to wait that long before your investment starts paying off.
Business overview: If you are familiar with the industry, you can quickly skip to the business overview of the company. This section should give you a detailed picture of the various segments and markets that the company operates in, its competitive strategy and some aspects of its operational performance such as capacity utilisation, terms of joint venture agreements, existing resources and facilities and competition. More information on the background of the company and its promoters can also be found in the history and management sections.
Financial Statements: The consolidated profit and loss account and balance-sheet are the main financial statements you need to look at and these should be read along with the management discussion and analysis. This should provide you a basic overview of the company’s revenue streams, profitability, debt and cash levels — basic information for those who do not understand financial mumbo-jumbo. Good offer documents would have a detailed break-up of segment sales and profitability and clearly explain factors that helped or hurt performance in each of the last three-five years.
A quick scan of these basic sections should suffice and help you raise the right questions when talking to your broker/financial adviser, rather than just take their word (remember, they could have vested interests) for it.
You can also take some investment cues from other sections of the offer document. For instance, the capital structure section could reveal the presence of blue-chip institutional investors, which could enhance your comfort level regarding the offer fundamentals.
The “basis of issue price” section should, theoretically, provide a justification for the valuation of an offer. This, however, is seldom the case.
Comparisons to “peers” could be misleading. It is important to relate the fundamentals of a company with players that are really comparable in terms of size and segments of operation. Similarly, it is better to restrict your valuation comparisons to immediate peers rather than refer to the “industry average”.
Finally, an offer document is only as good as the disclosures a company chooses to make. If a company discloses its practices in a clean and comprehensive manner, it speaks volumes of its management. When a company’s plans and strategy are well-articulated in the offer document, it tends to inspire greater confidence in the management’s execution capabilities. Reading an offer document for about an hour or two is time well spent, given that it provides access to qualitative inputs which are not readily available from the usual news sources.
You can download the final “red herring prospectus” from www.sebi.gov.in and from the company and lead manager Web sites.
Shanthi Venkataraman
No comments:
Post a Comment