How to Analyse an IPO Before Applying: DRHP, Valuation & Red Flags

In 2025, India fell in love with IPOs all over again. A record 373 companies went public and raised about ₹1.95 trillion between them, and millions of first-time investors clicked “Apply” on listings they had researched for all of ten minutes. Then the maths arrived. By March 2026, most of those 2025 mainboard listings were trading below their issue price. If you want to analyse an IPO properly — instead of chasing the grey-market buzz — you need a repeatable way to read the offer document, test the valuation, and spot the warning signs before your money is locked in. This guide gives you exactly that method.

Why an IPO Deserves Analysis, Not Just an Application

An IPO feels different from buying a normal share. There is a deadline, a lot size, a frenzy of WhatsApp forwards, and a “grey market premium” number that everyone quotes as if it were a guarantee. That pressure is exactly why so many retail investors skip the homework — and exactly why so many of them are disappointed three months later.

Here is the uncomfortable truth the 2025 cycle exposed. Strong demand on listing day says a lot about hype and very little about whether the business is worth its price. According to Business Standard's year-end review, the 103 mainboard IPOs of 2025 delivered an average listing-day gain of roughly 9.5%, but by March 2026 that had flipped to an average return of about −7%, with the median listing down nearly 18%.

The price you pay at the IPO is the one variable you fully control — so it is the one that deserves your scrutiny. A great company bought at a silly valuation is still a poor investment. Learning to read the offer document is how you separate the two.

None of this means IPOs are a trap to be avoided. It means an IPO is a decision to be analysed like any other. If you want this foundation built properly rather than pieced together from videos, a structured stock market investing course compresses years of trial and error into a few focused weeks.

What 2025 Proved: The Listing Pop Fades

The single most useful chart for any IPO applicant is not the grey-market premium. It is the gap between how a year's listings behave on day one and how they behave a few months later. The 2025 cohort is a textbook example.

On their listing day, 69 of the 103 mainboard IPOs closed above their issue price — a healthy two-thirds, the kind of number that fuels “listing gains are easy money” talk. But staying power was a different story. By 16 March 2026, only 37 of those same 103 companies were still above their offer price, according to IPO tracker indiaipo.in.

Read that as a warning about process, not a prediction about any single stock. Aditya Infotech and Ather Energy more than doubled from their issue price in the same period, while names like Glottis fell roughly two-thirds. The winners and losers were not random — they were separated by fundamentals and price. The applicants who did the work were the ones positioned to tell them apart. Before you even reach valuation, it helps to understand the mechanics of how an IPO price band is set, because the band frames every valuation judgement that follows.

How to Read a DRHP in Six Steps

The Draft Red Herring Prospectus (DRHP) is the single document that lets you analyse an IPO on facts rather than feelings. Every company files it with SEBI before going public, and you can download it free from the SEBI website, the BSE or NSE IPO sections, or the lead merchant banker's site. It runs to hundreds of pages, but you do not need all of them. You need six.

Step 1 — Start with the risk factors

Companies are legally required to disclose every material risk, and these are listed roughly in order of severity, with the most serious first. Read litigation against the company, regulatory and licence dependence, key-person dependency, and customer concentration. A line saying one client contributes more than 30% of revenue is a genuine fragility, not boilerplate.

Step 2 — Check the objects of the issue

This tells you what the company will do with your money: expansion, debt repayment, working capital, or acquisitions. Money going into growth is a different signal from money simply repaying old loans.

Step 3 — Read three years of financials

Look for the direction of revenue, the consistency of operating margins, and whether reported profit is backed by operating cash flow. Profit that never converts into cash is a question worth answering before you apply. Also note one-off items — a sudden jump in profit driven by an asset sale or a tax write-back is not the same as steady operating growth, and it inflates the trailing earnings that the valuation is built on.

Steps 4 to 6 — People, structure and price

The promoter and management section discloses qualifications and any criminal cases, financial delinquency, or pending litigation against the people running the business. The issue-structure section reveals the split between fresh shares and an offer for sale. And the valuation basis lets you compare the asking price-to-earnings multiple against listed peers. One quirk to remember: the DRHP carries no final price band or lot size — you will see [●] placeholders, and the actual numbers appear only in the later RHP, with SEBI sizing the retail lot so the minimum application stays near ₹13,000–₹15,000. If this is your first offer document, note that SME IPOs work differently from mainboard issues on disclosure and lot size, so read those prospectuses with extra care.

OFS vs Fresh Issue: Where Your Money Actually Goes

Two IPOs can raise the same headline amount and mean completely different things, depending on how the issue is structured. This is one of the most overlooked checks when people analyse an IPO, and the offer document spells it out plainly.

A fresh issue creates new shares, and the proceeds go to the company to fund growth, repay debt, or strengthen working capital. An offer for sale (OFS) is existing shareholders — promoters, founders, or early investors — selling part of their stake; that money goes to the sellers, not the business, and the company's share count and balance sheet are unchanged.

Neither structure is automatically bad. A small OFS that lets an early venture fund exit is normal. But when the promoter — the founding family that built the business — is cashing out a large slice, it is worth pausing. An offer that is almost entirely an OFS can read as an exit rather than a growth raise, unless the fundamentals clearly justify the price.

Red Flags That Should Make You Skip an IPO

Once you can read the document, a handful of warning signs do most of the filtering. None is fatal on its own, but two or three together is usually your cue to pass and wait for a better entry after listing.

• An almost-entirely OFS issue where promoters are the main sellers — the business gets little fresh capital while insiders cash out.
• Customer or supplier concentration — one client driving more than 30% of revenue means one lost contract can reset the whole thesis.
• A valuation far above listed peers with no growth or margin advantage to justify the premium. Compare the price-to-earnings multiple, do not assume it.
• Profit that does not turn into cash — rising reported earnings alongside weak or negative operating cash flow.
• Serious litigation or governance issues against promoters or directors, disclosed in the risk and management sections.
• Applying purely on grey-market premium — an unofficial, unregulated number that reflects sentiment, not value, and can vanish by listing day.

The grey-market premium is the single most over-trusted figure in the whole IPO process — treat it as gossip, not analysis. If you have applied and want to track the outcome, our guide on how to check your IPO allotment status online walks through the process step by step.

How to Turn This Into a Repeatable Habit

Analysing an IPO is not a one-off act of brilliance; it is a checklist you run every time. Download the DRHP, read the risk factors first, check where the money goes, test the valuation against peers, and scan for the red flags above. If two or more fire, you wait. If the business is strong and the price is fair, you apply with conviction instead of FOMO.

A practical tip on timing: the DRHP gives you the qualitative picture weeks before the issue opens, so use that window to read it calmly, while the final price band and lot size arrive only in the RHP closer to the open. By the time the three-day bidding window starts, your homework should already be done — you are simply deciding whether the final price fits the value you established earlier, not scrambling to form a view under deadline pressure.

That discipline is the difference between the applicants who treated 2025 as a casino and the ones who treated it as a market. For 14 years and across 50,000+ learners, NIFM has taught exactly this kind of evidence-first investing — the habit of reading the document before reading the hype.

Frequently Asked Questions

How do I analyse an IPO before applying?

Download the company's DRHP from SEBI, BSE, NSE, or the merchant banker's website, then read six sections: risk factors, objects of the issue, three years of financials, promoter and management details, the issue structure, and the valuation basis. Compare the asking valuation with listed peers and check for red flags before you commit money.

What is a DRHP and where can I find it?

The Draft Red Herring Prospectus is the preliminary offer document every company files with SEBI before an IPO. It contains the company's financials, risks, and issue details, though not the final price band or lot size. You can download it free from the SEBI website, the BSE and NSE IPO sections, or the lead merchant banker's site.

What is the difference between OFS and fresh issue in an IPO?

In a fresh issue the company creates new shares and keeps the proceeds for growth or debt repayment. In an offer for sale (OFS), existing shareholders sell their shares and the money goes to them, not the company. A large promoter-led OFS can signal an exit, so always check the split in the DRHP.

Is the grey-market premium a reliable way to judge an IPO?

No. The grey-market premium is an unofficial, unregulated indicator of sentiment that can change daily and often collapses by listing day. It tells you nothing about the company's fundamentals or valuation. Use it as background noise at most, never as the basis for applying.

Why did so many 2025 IPOs fall below their issue price?

Strong listing-day demand reflected hype and liquidity more than value. As of March 2026, around 64% of 2025 mainboard IPOs traded below their issue price, even though most had opened above it on debut. Many came at rich valuations that the underlying businesses could not sustain, which is precisely why pre-application analysis matters.

Disclaimer: This article is for educational purposes only and does not constitute investment advice. Markets carry risk — please do your own research or consult a qualified financial professional before investing. NIFM provides training and exam preparation; certification exams conducted by regulatory or professional bodies are administered by those bodies independently.