By the IPO Cracker editorial team · Updated April 2026 · 12 min read
Most IPO coverage focuses on two things — the grey market premium and the subscription multiple. Both matter, but neither tells you whether the underlying business is worth owning. This guide lays out the five questions an institutional analyst would ask before putting money into a new issue. You can apply the same checklist in an hour, using only the RHP and public data.
Step 1 — What does the company actually do?
Start with the "Our Business" section of the RHP (Red Herring Prospectus), not the marketing summary. You want to know, in two or three sentences, what the company sells, to whom, and how it makes money. If you cannot write that down clearly after reading the section, the business model is either genuinely complex (rare) or poorly disclosed (common). Both are reasons to slow down.
Questions to answer at this stage:
- What does the customer pay for — a product, a recurring service, a license, or a commission?
- How concentrated is the customer base? Higher single-customer concentration generally warrants closer examination.
- Does the company appear to have pricing power, or is it competing primarily on cost?
- What is the sales cycle — days, months, or quarters?
The "Industry" section of an RHP typically highlights the total addressable market. This is useful context, though investors often weigh the company's own historical performance — win rate, customer retention, repeat business — alongside broader market-size estimates.
Step 2 — What do the financials actually say?
Every RHP includes three years of audited financial statements. Most investors stop at revenue growth and net profit. That is not enough. The four numbers that actually matter are:
Revenue quality
Revenue growth is more informative when it is durable. Consider whether the growth is coming primarily from new customers, from higher volume to existing customers, from price increases, or from one-off contracts. Each of these has different implications for sustainability.
Margin trend
The trend in gross and operating margins over three years is often more informative than the absolute level in any one year. Improving margins alongside revenue growth can indicate operating leverage, while stable or declining margins alongside growth may warrant further examination.
Working capital
A healthy income statement can sometimes mask working-capital strain. Receivable days and inventory days are useful cross-checks: if either is rising faster than revenue, reported profits may not be translating into cash at the same pace.
Leverage
Debt-to-equity, interest coverage, and the company's ability to service debt from operating cash flow are standard leverage checks. The appropriate level varies meaningfully by sector — capital-intensive businesses carry higher debt naturally, while asset-light businesses typically carry less. Compare the company against sector peers rather than a fixed threshold.
Step 3 — Valuation checks
A few simple valuation comparisons can provide a useful frame of reference for most IPOs.
Post-issue P/E versus listed peers
The RHP lists industry peers. Comparing the IPO's post-issue P/E against the peer median provides a starting point. Where a company trades at a material premium to the median, the supporting rationale (growth rate, margin profile, differentiated model) is typically worth examining.
Implied growth
One useful exercise is to work out what future growth rate would justify the IPO's valuation given the peer multiple. Comparing the required growth rate against the company's historical growth can give a sense of how much future performance is already priced in.
Return on capital
For capital-intensive sectors such as manufacturing, infrastructure, or utilities, return on capital employed (ROCE) is often a useful complement to P/E. Companies generating higher ROCE than peers, with stable or improving trends, may be better positioned for long-term compounding.
Step 4 — Demand signals on the issue
Once you have a view on the business and valuation, the demand-side signals provide additional context.
Anchor investor composition
The RHP discloses the anchor investor list. The mix of investor types — long-only domestic mutual funds, insurance companies, foreign portfolio investors — can be useful context, since different investor types often have different holding horizons.
QIB subscription
The QIB (Qualified Institutional Buyer) subscription multiple reflects institutional demand. Because the QIB category is populated by professional investors, the level of oversubscription can be a useful signal alongside other factors.
Retail pattern
Retail oversubscription levels influence allotment probability through the lottery mechanism. Higher oversubscription typically means lower per-application allotment chances. Our Allotment Chances tool estimates this probability based on live subscription data.
GMP direction
As discussed in our GMP article, the direction and trend of GMP are generally more useful than its absolute magnitude.
Step 5 — What are the disclosed risks?
The "Risk Factors" section of the RHP is legally mandated boilerplate in some places and genuinely useful in others. Read it linearly, looking for:
- Customer or supplier concentration. Quantitative data is more useful than narrative descriptions.
- Related-party transactions. Transactions with promoter-owned entities are worth understanding separately from third-party revenue.
- Regulatory and litigation exposure. Pending tax disputes, environmental clearances, and licence renewals can have material implications.
- Issue structure. Whether the IPO is structured primarily as a fresh issue, an Offer for Sale, or a combination affects where the proceeds flow and how existing-shareholder ownership changes.
- Use of proceeds. Categories such as debt reduction, working capital, general corporate purposes, and acquisitions each carry different interpretations worth evaluating on a case-by-case basis.
Putting it together
Working through all five steps on an IPO becomes faster with practice, as you learn where different pieces of information sit inside the RHP. The goal of the framework is to produce a thoughtful view of the business, the financials, the valuation, the demand signals, and the disclosed risks — and to use that combined picture rather than any single number.
How we use this framework on this site
The four-factor scoring engine we apply to every IPO is a machine-readable compression of steps 2 through 4 above. Step 1 (business understanding) and step 5 (risk reading) are not things a scoring engine can do well — you still have to open the RHP. The IPO list and each IPO's detail page surface the quantitative signals; the methodology is documented in our How We Recommend guide.
Summary
Evaluating an IPO thoroughly goes beyond predicting the listing price. Understanding the business, financials, valuation, and disclosed risks — using public documents — gives investors a more complete picture. This five-step framework is one way to structure that review; it is educational in nature and not a substitute for personalised financial advice.
This article is educational and informational only. It is not investment advice. Please consult a SEBI-registered Investment Advisor for guidance specific to your situation.