Most IPO discussion online revolves around GMP and subscription numbers. Those measure sentiment. They do not tell you what the company does, how it makes money, or what price you are paying relative to its earnings. That information sits in the prospectus, and it is free to read. This checklist gives beginners a structured, non-advisory way to go through it in about an hour.
Key Takeaways
- Start with the RHP summary section, then drill down into financials and risk factors.
- Check three to five years of numbers, not one good year.
- Profit should be backed by operating cash flow.
- Valuation is only meaningful next to peers and growth.
- None of these checks predicts listing-day price — they inform understanding.
Before You Start: Get the Right Document
Use the red herring prospectus (RHP) — the final offer document that carries the price band — rather than news summaries. It is available on SEBI's site, the NSE and BSE issue pages, and the lead managers' websites. Our guide to DRHP and RHP explains the difference and which sections to open first.
1. Understand the Business Model
Ask in plain words: What does the company sell, to whom, and why do customers pay? The "Our Business" chapter describes products, customers, plants and competitive strengths. Then check the independent industry report included in the document: how fast is the sector growing, and where does the company sit in it?
- How many products, customers and geographies drive revenue?
- Is revenue concentrated in a few customers or one product?
- Is the business cyclical, seasonal or regulated?
2. Read the Objects of the Issue
This section says what the money raised will be used for — but only for the fresh issue. First find the split between fresh issue and offer for sale. Then read how the fresh money will be used:
- Debt repayment — reduces interest burden but adds no new capacity.
- Capital expenditure — check whether the projects are specific, costed and already underway.
- Working capital — supports growth but signals capital-hungry operations.
- General corporate purposes — flexible spending; regulation caps it at 25% of gross proceeds.
3. Study the Revenue and Profit Trend
The "Financial Information" chapter shows restated financials for the last three to five periods. Look at the direction and stability:
- Revenue growth — steady growth is easier to interpret than a single sharp jump.
- EBITDA margin and net margin — are they expanding, stable or shrinking?
- One-offs — check for exceptional gains or losses that distort profit.
- Latest period — nine-month or stub-period figures show recent momentum.
4. Check Whether Profit Turns Into Cash
Profit is an accounting number; cash flow from operations shows whether the business collects money. Compare cumulative operating cash flow with cumulative profit after tax over the period. A large, persistent gap can point to stretched receivables or inventory. Also look at receivable days and inventory days if provided — rising days mean cash is getting stuck in the business.
5. Look at Debt and the Balance Sheet
Interest Coverage = EBIT ÷ Interest Expense
Check how much of the business is funded by borrowing, how interest costs compare with operating profit, and whether debt is falling or rising ahead of the IPO. If part of the fresh issue is meant to repay debt, see how much of the total borrowing it actually clears.
6. Review Return Ratios
Return ratios show how well the company turns capital into profit. The prospectus usually reports them in its key performance indicators.
- Return on Equity (ROE) = Net profit ÷ Average shareholders' equity
- Return on Capital Employed (ROCE) = EBIT ÷ (Total assets − Current liabilities)
Look for consistency over several years and compare with listed peers. A high ROE achieved only through very high debt reads differently from one earned with modest borrowing.
7. Compare Valuation With Peers
The "Basis for Issue Price" section lists valuation multiples at the issue price and compares them with listed peers. Learn the standard ones:
| Multiple | Formula | What it tells you |
|---|---|---|
| P/E | Issue price ÷ EPS | Price paid per ₹1 of annual earnings |
| Price-to-book | Issue price ÷ book value per share | Price relative to net assets |
| EV/EBITDA | (Market cap + debt − cash) ÷ EBITDA | Business value relative to operating profit, independent of capital structure |
| Market cap at issue | Issue price × post-issue shares | Total value the market is asked to pay for the company |
Worked example (illustrative): Upper price band ₹200, EPS ₹8 → P/E = 25. If listed peers in the same business trade around 20–30 times earnings, the issue's multiple sits within that range. If growth and margins are weaker than peers', a similar multiple may deserve a closer look. The point is context: multiples are compared, not judged alone.
8. Examine Promoters and Governance
- Promoter holding before and after the IPO — how much are they selling?
- Pledged shares — a high pledge can indicate financial stress at the promoter level.
- Related-party transactions — significant dealings with promoter-linked entities deserve a careful read.
- Litigation — the "Outstanding Litigation" chapter tabulates cases by type and amount.
- Auditor remarks — qualifications or emphasis-of-matter notes in the financial statements.
- Board and management — experience and track record in the same industry.
Lock-in of promoter shares is covered in our article on the IPO lock-in period.
9. Read the Risk Factors
Risk factors are the company's own list of what could hurt the business. Do not skip them. Pay particular attention to customer or supplier concentration, dependence on a single plant, regulatory changes, commodity price exposure, pending disputes, and any risk described as "material" that affects earnings directly.
Put It Together: A One-Page Summary Template
Before deciding anything, write one line for each of the nine areas. If you cannot fill a line, that is a sign to read that part of the document again.
| Area | Your note |
|---|---|
| Business model | What it sells, to whom, and key dependencies |
| Objects of the issue | Fresh vs OFS split; how fresh money is used |
| Growth | Revenue and profit CAGR; margins direction |
| Cash flow | Operating cash flow vs profit |
| Debt | Debt-to-equity and interest coverage |
| Returns | ROE and ROCE trend |
| Valuation | P/E and other multiples vs peers |
| Promoters | Holding, pledge, related-party dealings, litigation |
| Risks | Top three risks in the company's own words |
Frequently Asked Questions
Sources & Further Reading
- SEBI — offer documents filed by issuers (DRHP/RHP) and ICDR disclosure requirements
- NSE India — offer documents and issue information
- BSE India — offer documents and issue information
Rules and limits in India's IPO market are revised from time to time. This article was last reviewed on September 19, 2026; confirm the current position on sebi.gov.in and in the offer document of the specific issue before relying on any number here.
