Indian stock exchanges have accounted for 25% of the global IPOs in the year 2024. This growing IPO landscape in India has also witnessed oversubscription many times, making it difficult to get shares allotted. The high-return opportunity it offers to investors encourages investors to understand the IPO valuation, key metrics, and what is the IPO allotment process.

Understanding IPO Valuation Meaning

An initial public offering, sometimes known as an "IPO," is the first time a private firm offers shares to the public on the stock market. On the other hand, the process of establishing a reasonable company valuation in order to establish the proper IPO price is known as IPO valuation. A draft IPO value prospectus, which describes the process for calculating the price, is presented to SEBI by an underwriter after a thorough analysis of all the variables affecting a company's valuation. 

Valuation Metrics of an IPO

The valuation of an IPO consists of very careful consideration of several key metrics. These metrics help investors assess how worthy the company is and whether the IPO price gives an accurate representation of the company's value.

1. Price-to-Earnings (P/E) Ratio

The most common metric when valuing an IPO is the P/E ratio. The P/E ratio compares the company's current share price with its per-share earnings. A greater P/E can imply that the company is projected to rise significantly in the short term. However, this also reflects overvaluation if the company cannot meet the expectations.

2. Price-to-Sales (P/S) Ratio

The P/S ratio depicts how much market capitalization a company has in relation to its total sales or revenues. It is very useful in evaluating companies that have yet to achieve profitability. A lower P/S ratio might suggest that the stock is undervalued, while a higher ratio could indicate the opposite.

3. EV/EBITDA

The overall financial health of the company is given by the EV/EBITDA ratio, which compares the enterprise value (EV) to earnings before interest, taxes, depreciation, and amortization (EBITDA). Investors usually prefer this ratio because it clarifies the operational performance of the company without any influence from capital structure and tax rates.

4. Discounted Cash Flow (DCF)

DCF analysis computes the present value of the cash flows that the company will generate in the future. It's a highly exhaustive technique that considers the time value of money. Thus, it is widely used to value IPOs. However, this technique heavily depends on the assumptions made about future cash inflows and the discount rate applied.

The valuation metrics discussed above are a crucial part of the IPO allotment process. They form the basis for the investor to decide if the offered price of the IPO is reasonable or within the intrinsic value of the company.

IPO Allotment Full Form

The full form of IPO allotment is "Initial Public Offering Allotment." In this process, the company, in consultation with the underwriters, decides how to allot the shares among the applicants. This can be done through procedures such as proportionate allotment or lottery-based allotment.

In cases of oversubscription, when there is more demand for shares than the number available, applicants may not receive the desired number of shares. Some may get fewer shares than they applied for, while others may get nothing at all.

What is the IPO Allotment Process?

Before making an investment in an IPO, an investor should know what is the IPO allotment process. The term allotment refers to the process of distributing shares by the issuing company to investors when the IPO subscription period ends. The IPO allotment process is important because it reveals how many shares an investor will receive if the demand for that IPO surpasses the supply.

Conclusion

A proper understanding of the valuation metrics and intricacies involved in the IPO allotment process is important for any investor who wants to participate in an IPO. Some of these metrics are the P/E ratio, P/S ratio, EV/EBITDA, and DCF, by which the value of a company is determined before its IPO. Furthermore, knowledge about the IPO allotment process and the IPO allotment full form enlightens investors regarding their share allotment expectations.