When a current IPO hits the market, the buzz often focuses on growth potential, listing gains, and grey market premiums. However, savvy investors know that understanding risks—especially hidden ones—is crucial before investing. Whether you’re analyzing a listed IPO post-listing or reviewing a closed IPO for patterns, identifying risks early can protect you from unwanted surprises.
1. Read the Risk Factors in the RHP
The Red Herring Prospectus (RHP) might seem overwhelming, but the “Risk Factors” section is where hidden landmines often lie. It covers everything from regulatory challenges to legal proceedings and industry-specific vulnerabilities. If a current IPO has numerous unresolved legal cases or depends too heavily on one client, that’s a red flag.
2. Analyze Revenue Concentration
Look at how diversified the company’s revenue streams are. If over 50% of revenue comes from a single client or sector, any disruption can cause major setbacks. This risk often becomes apparent after a listed IPO starts trading and quarterly reports highlight instability.
3. Check for Promoter Red Flags
The reputation and history of the promoters play a big role. Look into their track record in past ventures or closed IPOs. Repeated instances of delayed projects, legal controversies, or financial mismanagement are signs to tread carefully.
4. Examine the Use of IPO Proceeds
Companies may raise funds for various reasons—growth, debt repayment, or general expenses. If a large portion of funds is going toward repaying loans or promoter exit, the growth narrative might be weak. Be cautious of such current IPOs as they may not deliver post-listing.
5. Compare Valuations
A major hidden risk in any IPO is overvaluation. Compare the pricing with competitors in the same sector who are already listed. Use metrics like P/E, P/B, and EV/EBITDA ratios. An overpriced current IPO may face downward pressure after listing, leading to poor returns for early investors.
6. Weak Corporate Governance
Check if the board of directors has independent voices or if it’s promoter-heavy. A lack of transparency or checks and balances can lead to poor decision-making, which may hurt investors after the company becomes a listed IPO.
7. Sectoral and Regulatory Risks
Some current IPOs belong to sectors with high regulatory intervention (e.g., telecom, healthcare, infrastructure). Even slight policy changes can heavily affect profitability. Review the RHP and industry reports to evaluate this exposure.
Conclusion
While IPOs can offer exciting opportunities, they also carry unique risks that are not always obvious. Digging deeper into the company’s fundamentals, valuations, governance, and disclosures will help you avoid investing in overhyped or unstable businesses. Whether evaluating a closed IPO or waiting for a listed IPO to settle post-listing, a cautious approach can go a long way in protecting your capital.
