How to do a Realistic Valuation for New IPO

In general, when a new company goes for an Initial Public Offering (IPO) it is doing that in order to generate capital for growing its business of buying assets. The question then becomes how we investors can evaluate fair value of such a stock. Since my blog is focused on do-it-yourself individual investor, I will use that as my frame of reference. That is, how does an individual investor understand the fair value of such a company? In this process I will use Reliance Power’s IPO as an example.

Let us accept this; valuing any company stock is a very subjective process. Each of us will do it a different way and come up with different arguments. This is valid for a new IPO or established company. In case of IPO, we do not have any past data to make an informed decision. So I look at company’s present state, relative comparison the market, and realistic growth potential. Let me explain this using an example of Reliance Power’s IPO. Continue reading rest of this article…