India is currently seeing a lot of IPOs that seem to be attractive investment opportunities for investors. Most of these IPOs have been successful and have been oversubscribed many times over. But how do you decide if the IPO is good or should you invest in every IPO? These questions can be easily answered by reviewing an important document before investing in any IPO. It is the Red Herring prospectus.
Given below is the meaning of RHP and the key points that need review before making any investment decisions for an IPO.
What is RHP(Red Herring Prospectus)?
RHP stands for the Red Herring Prospectus which highlights all the details of the IPO along with the relevant details of the company. These details include the important dates of the IPO, lot sizes, price range, objects of the IPO, the company’s business, its competitions, quality of management and promoter support, etc. The RHP is submitted by the company after SEBI approves the DRHP (Draft Red Herring Prospectus), the first step toward launching an IPO. The RHP can therefore be considered to be the bones of an IPO and has all the important information that can help investors decide if they want to invest in it.
Key factors to look for before investing in any IPO
While analyzing an IPO, the key factors that need to be considered or studied thoroughly by investors are highlighted below.
1. Promoter’s and management information and their backgrounds
The first and foremost information that should be accessed is the information about the promoters. RHP has complete information about the promoters’ background, their qualifications, details of the past companies held by them and their stake held in other companies too, and any past or current legal cases against them. This gives the investors a fair idea of their caliber to manage a company and their abilities to meet the company’s objectives.
2. Reasons for the IPO
Every RHP has an important section, namely, the objects of the IPO. This section highlights the purpose for which the company has initiated an IPO and how the proceeds from the same will be utilised. It can range from meeting existing debt obligations to the expansion of the business or takeover and financing of a new venture. This section also gives an insight into the future plans of the company and the direction it is taking.
3. Details of the company’s business and product details
The RHP also highlights the business of the company and the industry that it belongs to. The business model of the company along with the product and its lifecycle stage will tell investors if the company can adapt to the changing demands of the market or can survive the competition. This is a crucial analysis to understand the viability of the consumer in the long run and thereby the viability of investment in the company.
4. Strengths of the company
The RHP further highlights the strengths of the company that make it unique from its peers and work for a better future for the company. The strengths of the company can be in its better financials, better management quality, higher employee efficiency, a better quality of products and services in the industry or monopolistic position, etc. These features can guide investors regarding the relative position of the company in the industry.
5. Weakness or risks of the company
Every company has its own set of weaknesses that make an investment in such a company a risky proposition. Such risks can include any pending legal cases against the company or its management, any vulnerability on account of geographic or demographic demand, any innovation in the industry that has the potential to disrupt the entire market and market share of the company, inherent risks due to the nature of the industry, etc. These risks are also highlighted in the RHP and it is the responsibility of the company to disclose all its weaknesses duly to enable investors in making an informed investment decision.
6. Future projections
This section talks about the future plans of the company and its growth trajectory. It gives the investors a fair idea of what to expect from the company in the future and also ascertains if their plans are feasible and practical. These future projections are usually based on strong models and ascertainable future cash flows to assure the investors of the company’s growth trajectory.
7. Industry outlook and competitors
RHP also provides the industry outlook to which the company belongs. Any significant changes in the industry and the latest developments, and macroeconomic conditions that affect the industry as a whole are highlighted in this section. Such factors help in understanding the performance of the company in the short term as well as long term thereby allowing the investors to judge the relative performance of the company.
8. Financials of the company
One of the most crucial pieces of information that needs review and analysis before an investment is the financials of the company. The financial statements mainly include the balance sheet, profit and loss statement, and cash flow statements, other documents like the audit report, management report, etc. Investors can calculate various ratios from the financial statements and compare them to the industry average as well as their competition. This will give information about the assets, liabilities, reserves, profitability, dividend policy, capital structure, etc. Such information is crucial in ascertaining the financial health of the company.
The Red Herring Prospectus is the blueprint of the IPO and a detailed study of the same guides investors to decide if investment in the company is a good bet and a good addition to their portfolio. It is important to note that investors should not base their investment decision based on the grey market premium for the IPO, the details provided in the RHP should be the basis for forming an informed decision. Also, the risk appetite and the returns expectations of investors should align with that of the IPO even if it is a good investment opportunity. This will ensure that they have a healthy investment portfolio that suits and meets their needs.
A company has to submit the DRHP first when they want to launch an IPO and then the RHP after approval from the regulator.
Yes, every RHP should have the objects of the IPO clearly mentioned so investors can make an informed decision about the same.
Yes, the RHP has to disclose any legal issues that are pending against the company or its management.
The RHP for any IPO can be found on the website of SEBI or they can download it from the website of NSE or BSE.