Unlisted Share Research: A Practical Guide for Indian Investors

HT Syndication
New Delhi [India], July 16: Investing in a company pre-IPO brings a stock trader's thoughts to life. It is the next big thing since the emergence of companies like OYO and Zepto. However, taking a guess is not a way to build a stock portfolio, and researching unlisted shares is an excellent way to avoid sheer risk.
In contrast to public companies, private companies trading in the unlisted share market evade the disclosure regulations of the NSE or BSE-listed companies. Because of that, the unlisted share market requires extensive research since the truth is much harder to find. There are twelve key areas addressed in this guide that reveal essential information about unlisted share companies.
The Importance of Research for Unlisted Shares
Private corporations are not required to inform the public like listed companies. Information about private companies is relegated to annual submissions, management commentary, and sparse news articles.
The absence of formal information leaves investors with no choice but to rely on informal market communications. However, establishing a formal research methodology helps inform the fundamentals of a business and the quality of governance. Researching unlisted shares reveals more about a business than a listed share, particularly due to the lack of oversight.
11 Elements to Assess When Considering Investment in a Private Company
- Business Model
Begin with the business model. Where do revenues come from? Can the model be expanded? A business model with high operational efficiency can exhibit better business resilience than a model with a high reliance on external funding.
- Management Quality
The promoters and senior executives of an unlisted share company play a key role in the implementation of the business strategy. Review the backgrounds of the founders and assess the industry experience and the stability of the leadership team. A high turnover of senior executives is generally a negative indicator. A stable senior leadership team is a positive indicator of the interim strategy.
- Financial Performance
Recent financial performance helps assess future potential. Revenue trends need to be analyzed over a period of three to four years, and the focus should be on steady growth of cash flow and revenues, instead of annual revenues for one year.
- Market Opportunity
Even an efficiently run unlisted company can reach a business limit if there are few opportunities in the market. Consider the total addressable market, the growth potential of the related industry, and factors that may alter market demand in the future.
- Competitive Advantage
Defensible moats include patents and licenses, difficult-to-replicate distribution networks, and strong brand equity. As competition in an industry grows, the companies that are first to market and lack competitive advantages are those that experience the first negative pressure on profit margins.
- Valuation
There is no centralized trading for unlisted equities, leading to valuations being negotiated. For unlisted equities, revenue and earnings multiples comparisons to listed equities are often informative. Although strong revenue or earnings growth may be grounds to pay a premium, the premium should be supported by the fundamentals and not informal market pricing.
- Shareholding Pattern
The ownership structure shows the level of alignment amongst the stakeholders. High ownership concentration by promoters, steady participation by institutions, and low trading of ownership are positive signs. High ownership by promoters usually shows high confidence of the promoters in the future success of the company. Institutional participation usually indicates that the company has been previously analyzed and that it has undergone some level of due diligence.
- Market Sentiment
There are healthy and unhealthy signs in the private equity market. Private Equity markets are susceptible to the mood of the public. Trading equities at a steady premium is a healthy sign, while an erratic premium with price movements caused by a large volume of trades is a sign of speculation.
- Legal & Regulatory Compliance
There is legal and regulatory risk when dealing with unlisted equities, as there may be lawsuits or unresolved disputes with regulators. These are usually in the contingent liabilities section of the financial statements, and they can inhibit the growth of the company or delay an initial public offering.
- History of Dividends
While dividends are typically absent from private companies, their presence holds substantial value. Companies that pay dividends usually have steady cash flows paired with consistent and disciplined cash flows and capital allocation. These companies have corporate maturity and advanced governance structures. This becomes apparent when comparing established private companies against their early-stage counterparts.
- Exit Strategies
Looking at the exit strategy is a critical part of any deal. This could mean the company going public, being bought out, or a private equity deal occurring. The route the company will take becomes evident by how the executives speak about and foresee the future of the company. This could also mean that there is no foreseeable route, and the exit will be delayed.
Conclusion
Researching unlisted shares is a process that will be continually updated. The combination of limited disclosures and negotiated pricing leads to a greater level of importance for the research compared to publicly listed companies.
These twelve factors will not reduce the risk completely, but will replace guesswork with a more thorough understanding of the company, its governance, and growth. For those monitoring the innovations in the private sector of India, Delisted Stocks and other similar companies will help keep the research updated.
This is an information article only. It does not give investment advice, and it does not endorse the purchasing or selling of shares. Investors should perform their own research or hire a certified professional before investing.
Disclaimer:
This article is for informational purposes only and does not constitute investment advice or a recommendation to buy or sell any security. Readers should conduct their own due diligence or consult a qualified financial advisor before making investment decisions.
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