How is the IPO price determined?

Arriving at the IPO price is a process which involves a combination of various factors like Valuation, Demand, Growth Potential, Market Trends etc.

These are some of the key factors discussed which an underwriter (Merchant Banker) follows to determine the Issue price of an Initial Public Offer.

1. Company Valuation

2. Assessing the demand from the potential customers for the company’s stock

3. Company’s growth potential and it’s business model financial effectiveness

4. The current prices of the stocks of similar companies in the same sector

5. General overall market trend

 

1 - Company Valuation-

Valuation plays an important role in determining the IPO price. A company’s profitability, growth potential, and comparable companies are considered for arriving at the valuation of a company. For valuation methods follow this link: IPO Calculators

2- Assessing the demand for shares of the company-

The Lead Managers conduct road shows of the IPO amongst the QIBs and other investors and assess the demand of the shares amongst these investors. Higher demand often results in a higher price and vice versa. The IPO price generally is a price that the buyer would be willing to pay for a company and interaction with various investors and discussions on valuation helps BRLMs to arrive at the pricing. This includes the demand from institutional investors, who will buy large blocks of shares, and the retail demand from individual investors.

3 - Company’s growth potential and financial effectiveness-

The company with strong financials and a growing potential to increase its topline and the bottomline at a decent CAGR would certainly create much interest to the investors. The companies which maintain this CAGR will demand greater valuations and interest from the public.

4- Peer Review/Similar companies in the same sector-

Valuations of the similar companies operating in the same sector are considered while arriving at the IPO price. However, it’s not essential that the Issue is valued equivalent to the peers. Factors like profitability, leverage, CAGR, promoter background, product offerings are the differentiating factors.

5 -General overall market trend-

The market conditions prevailing in the market directly affect the IPOs. So if the stock market is doing well, there will be more IPOs in the market which affect the IPO pricing also to some extent.
 

In a nutshell, it's worth noting that the IPO pricing process is dynamic, and the final price is determined by a combination of factors, including investor demand, market conditions, and the company's valuation.