Introduction: The IPO Puzzle
You’re lounging on a Sunday afternoon, enjoying your favorite chai and scrolling through your trading app. A pop-up message ” ABC IPO opens for subscription tomorrow – don’t miss out!” it is so alluring. That’s how most investors are drawn into the IPO hype. But then comes the million-dollar question – how do you know the IPO is actually good for you?
India’s IPO market is heating up. In 2024, IPOs brought in a whopping ₹ 1.6 crore in 2024, that’s a staggering increase from the year 2023, when IPOs brought in ₹49,436. With such numbers, it is extremely easy to be caught up in euphoria. But seasoned traders know that not every IPO translates into long-term gains.
What Is IPO Grading—And Why It’s Just One Piece of the Puzzle
Some IPOs receive grades from rating agencies such as CRISIL or ICRA, usually ranging from 1 (poor fundamentals) to 5 (good fundamentals). These grades can sound handy, but they’re likely old news by the time the IPO launches. And grading is voluntary—many companies don’t bother at all.
That’s why investors require an individual scoring system—one that blends financial sense, business sense, and a dash of healthy skepticism.
Welcome to the IPO Scoring Game: 5 Things That Matter
Use this scoring system to pick winning IPOs in India. Each point gets a score between 1 and 5, giving a total score of 25.
Business Model & Industry Placement (5 points)
Ask yourself:
- Is the firm providing a unique proposition?
- Is it solving a rising problem?
- Is it situated in a cutting-edge industry (e.g., clean tech, digital infrastructure, SaaS)?
Startups in clean tech, fintech, EVs, or SaaS would generally score high here. Traditional industries would need exceptional performance to score highly.
Financial Health & Profitability (5 points)
- How is the trend in revenue and profit over the last 3 years?
- Are the margins going up or down?
- Is the company borrowing heavily?
Positive Signs
- Revenue CAGR > 15%
- Good EBITDA or reaching break-even
- Debt-to-equity ratio < 1 is good
Management & Governance (5 points)
Consider:
- Do they have sector experience?
- Is there transparency in disclosure?
- Are independent directors actively involved?
Avoid:
- High resignation rate in the company
- Auditors quitting before IPO
- Lack of independent directors
Valuation & Pricing (5 points)
Check if:
- Is the IPO overpriced compared to industry leaders?
Tools: Compare P/E with industry average. Check if the valuation is on future earnings or just hype.
Avoid IPOs with valuations that are significantly higher in terms of industry standards unless supported by strong financials.
Utilization of IPO Proceeds (5 points)
This is on intent:
- Will the funds be used for expansion, innovation, or repayment of debt?
- Or is it just a way for early investors/promoters to exit?
IPOs in which funds go towards business expansion are more inspiring.
Case Study 1: Ather Energy (2025 IPO)
- IPO Size: ₹2,981 crore
- Valuation: ₹11,600 crore
- Business Model (4/5): One of the handful of Indian EV firms with proprietary technology and growing market share.
- Financials (3/5): High top-line growth, but still incurring losses. FY24 operated at a loss of ₹344 crore.
- Management (4/5): Backed by Hero MotoCorp, with seasoned promoters.
- Valuation (3/5): High, but justifiable in the backdrop of the EV boom.
- Use of Proceeds (5/5): Clear plan: expand factories, R&D, retail network.
Overall Score: 19/25
Takeaway: Best for long-term investors who are optimistic about electric mobility.
Case Study 2: Honasa Consumer (Mamaearth) IPO (2023)
- IPO Size: ₹1,701 crore
- Valuation: ₹10,400 crore
- Business Model (4/5): Digital-first D2C personal care brand, high social media reach.
- Financials (2/5): ₹722 crore revenue in FY23, but narrow profits—₹14 crore net profit.
- Management (4/5): Visionary founders with good VC backing.
- Valuation (3/5): High P/B (10.45x) for a new FMCG brand.
- Use of Proceeds (4/5): Expansion of brand, offline.
Overall Score: 17/25
Takeaway: Hyped but risky. Strong brand, thin margins.
Case Study 3: LIC IPO (2022)
- IPO Size: ₹20,557 crore
- Valuation: ₹6 lakh crore
- Business Model (5/5): Largest insurer of India, more than 60% market share.
- Financials (4/5): Huge premium income, always profitable.
- Management (4/5): Government-owned with bureaucratic advantages and disadvantages.
- Valuation (3/5): Far lower than private peers (e.g., HDFC Life at ~4x EV).
- Use of Proceeds (3/5): 100% OFS by the Government.
Total Score: 19/25
Takeaway: Strong for conservative investors. Low-growth but stable.
How to Decode a DRHP (Draft Red Herring Prospectus)
The DRHP has the answers to the questions above, if you know where to look:
- Business Overview: Read how the company earns money and what makes it unique.
- Financials: Check revenue trends, EBITDA, net profit/loss.
- Risk Factors: Check for industry-specific problems, litigation, or dependence on key customers.
- Use of Proceeds: Growth financing = Good, exit of promoter = Bad
- Promoter Holding Post-IPO: Lower promoter holding post-IPO is a sign of potential future dilution or lack of interest.
Check SEBI’s website for DRHPs to know more about the company and its fundamentals.
Most Common IPO Mistakes of Retail Investors
- FOMO Buying: Do not invest on the basis of what your WhatsApp group is saying.
- Ignoring Financials: Don’t invest unless the numbers add up.
- Believing GMP Hype: GMP is no guarantee of listing returns.
- Not Verifying Anchor Investor Support: Lack of anchor demand is a red flag.
- Skipping the DRHP: The DRHP is thick, but skipping it is like buying a flat without looking at the brochure.
Try It Yourself: Rate a New IPO
Let’s assume that FinEdge Payments, an e-payments company, is undertaking an IPO.
Grade the IPO (1-5)
- Business Model
- Finances
- Governance & Management
- Valuation
- Use of IPO Proceeds
Total ___ /25
Rating Interpretation:
- 21–25: Strong Buy
- 16–20: Worth closer scrutiny
- 11–15: Risky business
- ≤10: Steer away
Final Conclusion: Scoring System to Pick Winning IPOs in India
- IPOs are thrilling, but contain your excitement.
- A fine IPO isn’t about listing profit—it’s also about creating long-term value.
- Score each IPO you review. It teaches discipline and confidence.
Next time you glance at an IPO advertisement promising the moon, take a deep breath. Play the IPO Scoring Game. Your future self will thank you.
