What You'll Learn Today
🔄 Where We Left Off (Session 17)
In Sessions 16-17, we built a complete LBO model — the private equity exit path. Now we explore the other major exit route: going public through an IPO.
✅ LBO Sessions (16-17)
- Sources & Uses, debt structuring
- Operating model + debt schedule
- Cash flow waterfall, J-Curve
- Sponsor returns: MOIC, IRR
- Value creation bridge
🆕 IPO Session (Today)
- Pre-IPO capitalization analysis
- Offering structure — primary vs. secondary
- Underwriting costs — gross spread + expenses
- Post-IPO shareholding pattern
- Pro forma financials — impact on P&L
IPO Fundamentals — Why Companies Go Public
Understanding the IPO process, motivations, and the book-building mechanism
Imagine you own a 20-unit apartment building worth ₹20 Cr. It's fully yours (100% equity). Now you want to expand — build 10 more floors — but you need ₹8 Cr. You have two options:
Option A (Private — like LBO): Find one rich investor to give you ₹8 Cr for a 40% stake. Simple, but you give up a lot of control.
Option B (IPO — go public): Register with SEBI, divide the building into 1 Cr "shares" (₹20 each), and sell 40 lakh new shares to thousands of small investors on the stock exchange. You raise ₹8 Cr, keep control, and your building is now "listed" — anyone can buy/sell shares daily.
An IPO (Initial Public Offering) is exactly Option B — a company sells shares to the public for the first time, raising capital from thousands of investors instead of one private buyer.
📖 Why Do Companies Go Public?
✅ Reasons to IPO
- Raise capital for growth, debt repayment, acquisitions
- Liquidity for existing shareholders (promoters, PE funds)
- Brand visibility and credibility with customers/suppliers
- Acquisition currency — use shares to buy other companies
- Employee incentives — ESOPs become more valuable
- Valuation discovery — market sets the price
❌ Costs & Drawbacks
- Underwriting fees: 3.5-7% of offering size
- Legal, audit, marketing costs: ₹50-150 Cr for large IPOs
- Ongoing compliance: SEBI regulations, quarterly reporting
- Short-term pressure: Market demands quarterly results
- Loss of control: Public shareholders have voting rights
- Lock-up period: Promoters can't sell for 6 months
📊 Case Study: TechVista Solutions Ltd — IPO Overview
TechVista Solutions is a mid-tier Indian IT services company founded in 2008. After 18 years of private growth, the promoters and their PE backer decide to take the company public.
| Metric | Value | Context |
|---|---|---|
| Revenue (FY26) | ₹3,200 Cr | Growing at 12% CAGR |
| EBITDA (FY26) | ₹832 Cr | 26% EBITDA margin |
| Net Income (FY26) | ₹480 Cr | 15% net margin |
| Total Debt | ₹600 Cr | Conservative leverage (0.75x Debt/EBITDA) |
| Existing Shares | 15 Cr shares @ ₹50 face value | Promoters: 70%, PE Fund: 13%, Others: 17% |
| Total Equity (Book Value) | ₹3,000 Cr | Paid-up Capital ₹750 + Reserves ₹2,250 |
TechVista has strong fundamentals: 26% EBITDA margins, 15% net margins, and low leverage (0.75x). The company wants to raise ₹1,000 Cr through fresh issue (new shares) to repay debt (₹400 Cr), fund growth capex (₹350 Cr), and add working capital (₹200 Cr). Existing shareholders will also sell ₹750 Cr worth of shares through an Offer for Sale (OFS).
IPO Offering Structure
Primary issue vs. Offer for Sale — and how pricing works through book-building
Your 20-unit building has 1 Cr shares. You want to raise money through the IPO:
Fresh Issue (Primary): You create new shares — like building additional floors on top of the building. The company gets the money. 4 Cr new shares × ₹250 = ₹1,000 Cr flows to the company.
Offer for Sale (Secondary): You sell existing shares from your personal holdings — like selling 3 of your 20 apartments to new buyers. The money goes to you (the selling shareholder), not the company. 3 Cr shares × ₹250 = ₹750 Cr goes to promoters and PE fund.
Total IPO size = ₹1,750 Cr, but the company only receives the primary portion (minus fees).
📊 TechVista IPO — Offering Structure
| Component | Shares (Cr) | Price (₹) | Amount (₹ Cr) | Where Money Goes |
|---|---|---|---|---|
| Fresh Issue (Primary) | 4.00 | 250 | 1,000 | To Company → Balance Sheet |
| — Debt Repayment | — | — | (400) | Reduce ₹600 Cr debt → ₹200 Cr |
| — Growth Capex | — | — | (350) | New delivery centers, technology |
| — Working Capital | — | — | (200) | Fund growth in operations |
| — General Corporate | — | — | (50) | Acquisitions, contingencies |
| Offer for Sale (Secondary) | 3.00 | 250 | 750 | To Selling Shareholders |
| — Promoters sell | 2.00 | 250 | 500 | Promoter partial exit |
| — PE Fund sells | 1.00 | 250 | 250 | PE partial exit (50% of holding) |
| Total IPO | 7.00 | 250 | 1,750 |
Offering Size = (New Shares + OFS Shares) × IPO Price per ShareTechVista: (4 Cr + 3 Cr) × ₹250 = 7 Cr × ₹250 = ₹1,750 Cr
📖 How Is the IPO Price Determined? — Book-Building
The IPO price isn't arbitrary — it's "discovered" through a SEBI-regulated process called book-building:
The book-running lead manager (BRLM) collects bids from institutional investors at various prices within the band. The cut-off price is where demand meets the offer size. TechVista's discovered price: ₹250/share (mid-point of ₹225–₹265 band), with 2.5x subscription.
Modeling Underwriting Costs & Expenses
The hidden price of going public — fees, commissions, and compliance costs
When you sell your apartment for ₹1 Cr, the broker charges 1-2% commission (₹1-2 Lakh). Plus you pay for stamp duty, registration, legal documentation, and advertising — another ₹5-8 Lakh. Your net proceeds are only ₹90-94 Lakh.
An IPO works the same way — the underwriters (like ICICI Securities, Kotak, Goldman Sachs) charge a gross spread of 3.5-7% to manage the entire process. On top, there are legal fees, audit costs, roadshow expenses, and regulatory fees. For TechVista's ₹1,750 Cr IPO, total costs are ₹141 Cr (8.1% of offering).
✏️ Worked Example 1: Complete IPO Cost Waterfall
| Cost Category | Rate / Amount | ₹ Cr | % of Offering |
|---|---|---|---|
| A. Gross Spread (Underwriting Fees) | |||
| Management Fee | 0.7% | 12.25 | 0.7% |
| Underwriting Fee | 1.3% | 22.75 | 1.3% |
| Selling Concession | 1.5% | 26.25 | 1.5% |
| Sub-total Gross Spread | 3.5% | 61.25 | 3.5% |
| B. Other Issue Expenses | |||
| Legal Fees | Lump sum | 25.00 | 1.4% |
| Audit & Due Diligence | Lump sum | 15.00 | 0.9% |
| Marketing & Roadshow | Lump sum | 20.00 | 1.1% |
| Regulatory & Filing (SEBI) | Lump sum | 10.00 | 0.6% |
| Printing & Other | Lump sum | 10.00 | 0.6% |
| Sub-total Other Expenses | 80.00 | 4.6% | |
| TOTAL ISSUE EXPENSES | 141.25 | 8.1% | |
Primary Proceeds (Fresh Issue) = 4 Cr × ₹250 = ₹1,000 Cr
Less: Gross Spread = (₹61.25 Cr) — deducted from primary proceeds
Less: Other Issue Expenses = (₹80.00 Cr)
Net Proceeds to Company = ₹1,000 − ₹61.25 − ₹80 = ₹858.75 Cr
Net Proceeds = Primary Proceeds − Gross Spread − Other ExpensesNet Proceeds = ₹1,000 − ₹61.25 − ₹80 = ₹858.75 Cr
📖 Understanding the Gross Spread (3.5%)
🏢 Management Fee (0.7%)
Paid to the lead manager (BRLM) for structuring the deal, coordinating with SEBI, managing the timeline, and advising on pricing.
TechVista: ₹12.25 Cr to ICICI Securities (BRLM)
🛡️ Underwriting Fee (1.3%)
Compensation for risk assumption — the underwriter guarantees the company will receive funds even if the IPO is undersubscribed.
TechVista: ₹22.75 Cr shared among syndicate members
🤝 Selling Concession (1.5%)
Commission paid to the broker network for distributing shares to retail and institutional investors. The "sales force" incentive.
TechVista: ₹26.25 Cr to syndicate brokers
📊 Indian vs. Global Spreads
India: 3.5-5% (SEBI regulates max fees)
US: 4-7% (higher for smaller deals)
Europe: 3-5% (similar to India)
Larger IPOs command lower % fees.
Post-IPO Capitalization & Shareholding
How the balance sheet transforms after the IPO — equity, debt, and ownership changes
Before the IPO, your apartment building has a small equity base (what you invested) and a big loan. After selling shares to the public:
1. Cash increases by ₹858.75 Cr (net IPO proceeds flow in)
2. Equity increases — new shareholders' capital (₹950 Cr paid-up + ₹800 Cr premium)
3. Debt decreases by ₹400 Cr (you used IPO money to repay expensive loans)
4. Interest expense drops from ₹54 Cr to ₹18 Cr — ₹36 Cr annual savings!
The company becomes stronger financially — more equity, less debt, lower interest burden. This is why IPOs are transformative events.
✏️ Worked Example 2: Pre-IPO vs. Post-IPO Balance Sheet
| Balance Sheet Item | Pre-IPO (₹ Cr) | IPO Effect | Post-IPO (₹ Cr) |
|---|---|---|---|
| Shareholders' Equity | |||
| Paid-up Capital (₹50 face × shares) | 750 | +200 (4 Cr × ₹50) | 950 |
| Share Premium / Securities Premium | 0 | +800 (4 Cr × ₹200) | 800 |
| Reserves & Surplus | 2,250 | +108.75 (net proceeds − capital − premium) | 2,358.75 |
| Total Equity | 3,000 | +1,108.75 | 4,108.75 |
| Debt | |||
| Total Debt | 600 | (400) repaid from IPO proceeds | 200 |
| Total Capital | 3,600 | 4,308.75 | |
• Equity grew from ₹3,000 → ₹4,109 Cr (+37%) — new shareholders' capital
• Debt fell from ₹600 → ₹200 Cr (−67%) — ₹400 Cr repaid from IPO money
• Debt/Equity ratio improved from 0.20x → 0.05x — much safer balance sheet
• Net proceeds used: ₹400 Cr (debt) + ₹350 Cr (capex) + ₹109 Cr (WCL + corp)
📊 Shareholding Pattern — Who Owns What After IPO
| Shareholder | Pre-IPO Shares (Cr) | Pre-IPO % | Shares Sold in IPO | Post-IPO Shares (Cr) | Post-IPO % |
|---|---|---|---|---|---|
| Promoters | 10.50 | 70.0% | (2.00) via OFS | 8.50 | 44.7% |
| PE Fund | 2.00 | 13.3% | (1.00) via OFS | 1.00 | 1.19% |
| Other Pre-IPO | 2.50 | 16.7% | — | 2.50 | 13.2% |
| New IPO Investors | — | — | 7.00 issued | 7.00 | 36.8%* |
| Total | 15.00 | 100% | 19.00* | 100% |
* Note: Of 7 Cr IPO shares, 4 Cr are new (fresh issue) + 3 Cr sold by existing shareholders (OFS). Total outstanding = 15 + 4 (new) = 19 Cr.
Post-IPO Ownership (19 Cr shares)
Free Float & Lock-Up
Free Float: 7 Cr / 19 Cr = 36.8% of outstanding shares
However, 3 Cr of these were sold by existing shareholders (already part of 15 Cr). The actual new public float = 4 Cr fresh + 3 Cr OFS = 7 Cr shares available for trading.
Lock-Up: Promoters & PE can't sell remaining shares for 6 months (SEBI mandate).
📊 Post-IPO Valuation Metrics
| Metric | Calculation | Value |
|---|---|---|
| Market Capitalization | 19 Cr shares × ₹250 | ₹4,750 Cr |
| Enterprise Value | ₹4,750 + ₹200 − ₹350 (cash post-capex) | ₹4,600 Cr |
| P/E Ratio | ₹4,750 / ₹480 | 9.9x |
| EV/EBITDA | ₹4,600 / ₹832 | 5.5x |
| EV/Revenue | ₹4,600 / ₹3,200 | 1.4x |
| Book Value per Share | ₹4,109 / 19 Cr | ₹216.26 |
| Price/Book | ₹250 / ₹216.26 | 1.16x |
Pro Forma Financial Impact
How the IPO transforms the income statement — debt reduction, growth investment, and EPS impact
After the IPO (selling shares + repaying debt + investing in growth), your apartment building's financials change dramatically:
1. Lower EMI: You repaid ₹400 Cr of debt — interest drops from ₹54 Cr to ₹18 Cr (saving ₹36 Cr/year)
2. Higher rent: The ₹350 Cr growth capex expands capacity — revenue grows 8% in Year 1 post-IPO
3. More rooms, more owners: New shares issued → more shares outstanding → EPS impact depends on whether net income growth exceeds share count dilution
The key question: Does the EPS increase or decrease post-IPO? If interest savings + growth > dilution from new shares, EPS goes UP.
✏️ Worked Example 3: Pro Forma Income Statement
| Income Statement (₹ Cr) | Pre-IPO (FY26) | Post-IPO (FY27E) | Change | Driver |
|---|---|---|---|---|
| Revenue | 3,200 | 3,456 | +256 | 8% growth (IPO-funded capex) |
| EBITDA (26%) | 832 | 899 | +67 | Revenue growth + margin improvement |
| D&A | (320) | (341) | (21) | Additional depreciation on new capex |
| EBIT | 512 | 558 | +46 | |
| Interest — The Key Change | ||||
| Interest Expense | (54) | (18) | +36 | ₹400 Cr debt repaid @ 9% |
| EBT | 458 | 540 | +82 | |
| Tax (25.17%) | (115) | (136) | (21) | Higher profits = more tax |
| Net Income | 343 | 404 | +61 | +17.8% growth |
| EPS Analysis | ||||
| Shares Outstanding (Cr) | 15.00 | 19.00 | +4.00 | New shares issued |
| EPS (₹) | ₹22.87 | ₹21.26 | (₹1.61) | 7% dilution |
Net income grew 17.8% (₹343 → ₹404 Cr) — driven by interest savings (₹36 Cr) and growth (₹67 Cr EBITDA).
BUT shares outstanding grew 26.7% (15 → 19 Cr) because of the fresh issue.
Since share growth (26.7%) > earnings growth (17.8%), EPS is DILUTED by 7% (₹22.87 → ₹21.26).
📊 IPO Pricing Scenarios — Impact on Valuation
📉 Conservative — Priced at ₹225 (Low End)
| Market Cap | 19 Cr × ₹225 = ₹4,275 Cr |
| P/E Ratio | ₹4,275 / ₹343 = 12.5x |
| Primary Proceeds | 4 Cr × ₹225 = ₹900 Cr |
| Net Proceeds (after costs) | ₹900 − ₹56 − ₹80 ≈ ₹764 Cr |
📊 Moderate — Priced at ₹250 (Base Case)
| Market Cap | 19 Cr × ₹250 = ₹4,750 Cr |
| P/E Ratio | ₹4,750 / ₹343 = 13.8x |
| Primary Proceeds | 4 Cr × ₹250 = ₹1,000 Cr |
| Net Proceeds (after costs) | ₹1,000 − ₹141 ≈ ₹859 Cr |
📈 Aggressive — Priced at ₹265 (Upper Band)
| Market Cap | 19 Cr × ₹265 = ₹5,035 Cr |
| P/E Ratio | ₹5,035 / ₹343 = 14.7x |
| Primary Proceeds | 4 Cr × ₹265 = ₹1,060 Cr |
| Net Proceeds (after costs) | ₹1,060 − ₹141 ≈ ₹919 Cr |
Hands-On Practice Exercises
Build the complete IPO model in Excel
🏋️ Exercise 1: Build the IPO Sources & Uses (20 min)
Objective: Create a Sources & Uses table for the FreshEdge Analytics IPO
| Assumption | Value |
|---|---|
| Pre-IPO Shares | 10 Cr @ ₹10 face value |
| Fresh Issue | 3 Cr new shares |
| OFS | 2 Cr shares by promoters |
| Price Band | ₹180 – ₹220 |
| Discovered Price | ₹200 |
| Gross Spread | 4.0% |
| Other Expenses | ₹60 Cr |
Calculate: (a) Total offering size, (b) Gross spread amount, (c) Net proceeds to company, (d) Money to selling shareholders
Total shares = 3 Cr (fresh) + 2 Cr (OFS) = 5 Cr
Offering Size = 5 Cr × ₹200 = ₹1,000 Cr
Gross Spread = 4.0% × ₹1,000 = ₹40 Cr
Primary Proceeds = 3 Cr × ₹200 = ₹600 Cr
Net Proceeds = ₹600 − ₹40 − ₹60 = ₹500 Cr
OFS Proceeds = 2 Cr × ₹200 = ₹400 Cr (goes to promoters, not the company)
🏋️ Exercise 2: Post-IPO Capitalization (20 min)
Objective: Build the post-IPO balance sheet for FreshEdge Analytics
| Assumption | Value |
|---|---|
| Pre-IPO Paid-up Capital | ₹100 Cr (10 Cr × ₹10) |
| Pre-IPO Reserves | ₹900 Cr |
| Pre-IPO Debt | ₹400 Cr |
| Debt to Repay from IPO | ₹250 Cr |
| Growth Capex | ₹150 Cr |
| Net IPO Proceeds | ₹500 Cr (from Exercise 1) |
Calculate: Post-IPO paid-up capital, share premium, reserves, total equity, and debt
10 Cr (old) + 3 Cr (fresh issue) = 13 Cr shares
13 Cr × ₹10 = ₹130 Cr (was ₹100 Cr)
3 Cr × (₹200 − ₹10) = 3 × ₹190 = ₹570 Cr
₹900 + ₹500 (net proceeds) − ₹130 (capital increase) − ₹570 (premium) − ₹250 (debt repay) − ₹150 (capex)
= ₹900 + ₹500 − ₹130 − ₹570 − ₹250 − ₹150 = ₹300 Cr
₹130 + ₹570 + ₹300 = ₹1,000 Cr (was ₹1,000 Cr — but shares increased from 10 to 13 Cr)
₹400 − ₹250 = ₹150 Cr
🏋️ Exercise 3 (Advanced): EPS Dilution Analysis (25 min)
Objective: Analyze whether FreshEdge's EPS is diluted or accreted post-IPO
| Assumption | Pre-IPO | Post-IPO |
|---|---|---|
| Revenue (₹ Cr) | 1,800 | 1,980 (+10%) |
| EBITDA Margin | 22% | 23% |
| Interest Rate on Debt | 10% | 10% |
| Tax Rate | 25.17% | 25.17% |
| Shares Outstanding (Cr) | 10 | 13 |
Calculate: Pre-IPO EPS, Post-IPO EPS, and whether the IPO is EPS-accretive or dilutive
Revenue: ₹1,800 Cr | EBITDA: ₹396 (22%) | D&A: ₹180 | EBIT: ₹216
Interest: ₹400 × 10% = ₹40 | EBT: ₹176 | Tax: ₹44 | Net Income: ₹132 Cr
EPS = ₹132 / 10 = ₹13.20
Revenue: ₹1,980 Cr | EBITDA: ₹455 (23%) | D&A: ₹210 (+30 new capex) | EBIT: ₹245
Interest: ₹150 × 10% = ₹15 | EBT: ₹230 | Tax: ₹58 | Net Income: ₹172 Cr
EPS = ₹172 / 13 = ₹13.23
Pre-IPO EPS: ₹13.20 | Post-IPO EPS: ₹13.23 | Change: +₹0.03 (+0.2%)
📚 Key Terms — Click to Flip
Test Your Understanding
10 objective questions on IPO Modeling
Key Takeaways
📝 What We Covered Today
- An IPO (Initial Public Offering) is when a private company sells shares to the public for the first time — raising capital from thousands of investors instead of one private buyer
- IPOs have two components: Fresh Issue (new shares → money goes to company) and Offer for Sale/OFS (existing shares sold → money goes to selling shareholders like promoters and PE funds)
- The gross spread (3.5-7% of offering) compensates underwriters for management, risk assumption, and distribution. On top, legal, audit, and marketing costs add 3-5% more. TechVista's total costs: ₹141 Cr (8.1%)
- Net proceeds to the company = Primary Proceeds − Gross Spread − Other Expenses. Only the primary issue generates capital for the company; OFS proceeds go to selling shareholders
- Post-IPO, the balance sheet transforms: equity increases (new capital), debt decreases (repayment from proceeds), and interest expense drops — saving TechVista ₹36 Cr/year
- EPS dilution is common in IPOs — new shares increase the denominator faster than earnings grow. TechVista's EPS fell 7% post-IPO despite 18% net income growth, because share count grew 27%
- The book-building process discovers the IPO price through investor bids within a price band (₹225-265). SEBI regulates the entire process including lock-up periods (6 months for promoters)
Session 19: Credit Rating Model
We'll build a credit rating model from scratch — understanding how rating agencies (CRISIL, ICRA, Moody's) assess default risk using financial ratios, industry factors, and qualitative overlays.