How to Evaluate IPO Valuation Before Applying — P/E, P/B, EV/EBITDA Guide

How to Evaluate IPO Valuation

Subscription numbers tell you what the crowd thinks. Valuation tells you what the company is actually worth. Here's how to do it.

The Core Principle

An IPO is just buying a business. Ask: "Would I buy this business at this price if it were already listed?"

If the answer is no, high subscription and GMP don't matter.

P/E Ratio (Most Common Metric)

P/E = Market Cap / Net Profit (Annual)

Or equivalently: P/E = Issue Price / EPS (Earnings Per Share)

How to use it:

1. Find the company's EPS from the offer document (restated financials)
2. Divide issue price by EPS
3. Find the average P/E of 3–5 listed peers
4. Compare

Example:

• IPO issue price: ₹300
• Company EPS: ₹12
• IPO P/E: 25x
• Peer average P/E: 20x
• Assessment: 25% premium to peers — justify with higher growth or better margins

Price-to-Book (P/B) — For Banks & NBFCs

Banks and financial companies are better evaluated on P/B:

P/B = Issue Price / Book Value per Share

For banks, P/B of 1–2x is reasonable. Above 3x needs strong justification (high ROE, fast growth).

EV/EBITDA — For Capital-Intensive Businesses

For manufacturing, infrastructure, or telecom companies:

EV/EBITDA = Enterprise Value / EBITDA

This strips out the impact of different debt levels and tax rates, making peer comparisons more accurate.

Price/Sales (P/S) — For Loss-Making Companies

Some IPOs (especially tech startups) are loss-making. Use:

P/S = Market Cap / Annual Revenue

Compare with listed peers. If an IPO is priced at 10x revenue while peers trade at 5x revenue, it needs to justify the premium with faster growth or better unit economics.

Red Flags in Valuation

• Negative cash flow + high P/E: Unsustainable
• Revenue growing but profits declining: Margin compression — be careful
• High debt + expensive valuation: Double risk
• "Offer for Sale" heavy IPO: Promoters exiting — who's buying if they're selling?

Fresh Issue vs Offer for Sale

• Fresh Issue: Company raises new capital for growth → positive
• Offer for Sale (OFS): Existing shareholders selling → money goes to them, not company → less positive

A healthy mix is acceptable, but a 100% OFS IPO where promoters are entirely cashing out deserves scrutiny.

Quick Valuation Checklist

• [ ] Calculate P/E vs 3–5 peers
• [ ] Check revenue and profit trend (3-year CAGR)
• [ ] Verify debt-to-equity ratio
• [ ] Assess Fresh Issue vs OFS split
• [ ] Check return ratios: ROE, ROCE
• [ ] Read the "Objects of the Issue" — where will fresh money go?

Key Takeaway

Never apply for an IPO without comparing its P/E (or relevant metric) with listed peers. A premium valuation needs justification — higher growth, better margins, or a unique market position. Subscription data and GMP reflect sentiment, not value.