Calculating and Valuing an IPO

Posted in Finance Articles, Total Reads: 555 , Published on 01 June 2016
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Initial Public Offering (IPO) as it is called is source of fundraising amongst many sources for a company to grow and expand. The proceeds of fund raised through public offering can be put to use anywhere by the company, all that is needed to be checked is that the funds shall be used properly. For this very purpose, we have a regulatory body or the watchdog “SEBI”. SEBI operates in India and is present to protect the wrongdoings by a company using the public money.

Acts like siphoning off the money raised through IPO, or a willful defaulting in payments is a common phenomenon in the business world, but who is to assure that the money which the company intends to borrow from the public will be utilized where it is intended to, for that very purpose SEBI not only permits the companies to come out with the IPO but also keeps a close eye on the company post the public offering.


Image: flickr


IPO is generally referred to as primary market, where the shares are bought directly from the company. This means that the company is coming to the markets/bourses for the first time with its own share offering. The IPO is provided to the retail investors and the Qualified Institutional buyers. These shares are parted with the holdings of the promoters. All this exercise of coming out with the IPO is done by Investment Bankers/Underwriter. They value the firm and then come out with the fair value as calculated by them, also the amount that is arrived at for the total value of the offering is basically an amount given by the promoters, which they feel is justified for the purported use of funds. Is it fair to accept the valuation by the underwriter or should we know the fair price of the stock price that is up for the grabs, or rather should we not know how to value the fair price of any of the service we intend to buy?

IPO valuation for a common man is very simple and can give him a fair idea of what to expect and what price to pay for the stocks up on the block. But for that to happen, we must be equipped with all the quantitative information mentioned below. All this information would be available in the offer document. And even if we know how to arrive at a value but then it is needed to read the red herring prospectus of the offer document.

1. Number of shares outstanding after the offering

2. Classes of shares offered

3. Current revenue, EBITDA, EBIT

4. Past growth of the revenue in percentage terms

5. Cash & the debt on the account books

6. No. of Options open and the strike price of the relevant option.

7. Fully Diluted Shares Outstanding (FDSO)

8. Price band/Price at which the share would be offered

9. All the historical data that is available


Apart from this we need to read everything possible about the company, all the qualitative data which would help us in deciding whether to buy or not. Let us look at the below table for the calculation part.

Prime info

Share price offered

 $ 30.00

Market Value of Debt

 $        2,000,000.00

No. of Shares offered

5000000

Revenue (FY 2015)

 $      50,000,000.00

Offering Size

 $ 150,000,000.00

Projected Revenue (2017)

 $      62,500,000.00

Pre-IPO Cash

 $ 10,000,000.00

EBITDA

 $      22,500,000.00



With the info we can get to know whether the company has fairly valued its IPO looking at estimated/projected earnings and Offered price. Looking at the future prospects of earnings is this better or the price is too high compared to the industry average.


This article has been authored by Rakshit Joshi from IIM Kashipur


Share price offered

 $                       30.00

Market Value of Debt

 $        2,000,000.00

No. of Shares offered

5000000

Revenue (FY 2015)

 $      50,000,000.00

Offering Size

 $    150,000,000.00

Projected Revenue (2017)

 $      62,500,000.00

Pre-IPO Cash

 $      10,000,000.00

EBITDA

 $      22,500,000.00


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