The Complete IPO Guide for Indian Investors · Chapter 5 of 15
How to Read a DRHP and RHP
Two documents, one story
The Draft Red Herring Prospectus (DRHP) is filed with SEBI for comments before the issue. The Red Herring Prospectus (RHP) is the near-final version filed just before the issue opens, and it is the document you should read. It contains the price band, the dates and the final disclosures.
Where to start
Begin with the summary of the issue, then read objects of the issue (what the money will be used for), the structure of the offer (fresh versus OFS, category split) and the capital structure. Skim the business section, but read it with attention to customer, supplier and geographic concentration, and to what the company actually sells.
Risk factors and litigation
Risk factors are long and some are boilerplate, but the first few and those with numbers attached usually matter most. Check outstanding litigation against the company, its promoters and directors, and look for contingent liabilities that could affect profit.
The numbers
Look at at least three years of revenue, profit, operating cash flow, debt, return on equity and working-capital days. A company that reports profits but never generates cash deserves questions. Compare the pre-IPO shareholding with the post-IPO shareholding to see how much promoters and investors are selling.
A five-minute screen
If you have only five minutes: (1) read the objects of the issue; (2) note fresh versus OFS; (3) check the last three years' profit and cash flow; (4) check debt against equity; (5) read the first page of litigation. Any one of these can make you stop.
Using the tools
LiveIPOData links the prospectus for each issue in the Prospectus Centre, so you can open the RHP in one click from the issue page.
Key takeaways
- Read the RHP, not only news summaries.
- Objects of the issue and the fresh-versus-OFS split show the real purpose.
- Check cash flow, debt and litigation, not just profit.
- A five-minute screen can save you from a poor application.