Why Peer Comparison Matters
Since IPO companies have limited trading history, comparing them with similar listed companies provides the best benchmark for valuation. Peer comparison helps you determine if an IPO is fairly priced, overvalued, or offers a bargain.
Identifying Comparable Companies
What Makes a Good Peer?
- Same Industry: Core business should be similar
- Similar Business Model: Revenue generation methods align
- Similar Size: Revenue and market cap in same range
- Similar Geography: Operating in similar markets
- Similar Stage: Mature vs growth stage
Finding Peers
From Prospectus:
- Look in "Our Industry" or "Peer Comparison" sections
- Be aware companies may cherry-pick favorable comparisons
Independent Research:
- Use stock screeners (Screener.in, Trendlyne)
- Filter by industry/sector
- Check industry classifications (NIC codes)
- Read analyst reports on the sector
Key Metrics for Comparison
Valuation Multiples
| Multiple | Best For |
|---|---|
| P/E Ratio | Profitable, stable companies |
| P/B Ratio | Banks, NBFCs, asset-heavy companies |
| EV/EBITDA | Capital-intensive industries, varying debt levels |
| P/S Ratio | Loss-making companies, early-stage growth |
| EV/Revenue | Tech companies, SaaS businesses |
Growth Metrics
- Revenue growth rate (3-year CAGR)
- Profit growth rate
- Market share trend
- Order book/pipeline growth
Profitability Metrics
- Gross margin
- Operating margin
- Net profit margin
- ROE (Return on Equity)
- ROCE (Return on Capital Employed)
Financial Health
- Debt-to-Equity ratio
- Interest coverage ratio
- Current ratio
- Cash conversion cycle
Step-by-Step Comparison Process
Step 1: Create a Peer Table
| Company | Revenue (Cr) | PAT (Cr) | P/E | EV/EBITDA | ROE | Growth |
|---|---|---|---|---|---|---|
| Peer A | 1,000 | 100 | 20x | 12x | 18% | 15% |
| Peer B | 800 | 80 | 18x | 10x | 15% | 12% |
| Peer C | 1,200 | 120 | 22x | 13x | 20% | 18% |
| Peer Avg | 1,000 | 100 | 20x | 12x | 18% | 15% |
| IPO Company | 900 | 90 | 25x | 15x | 22% | 25% |
Step 2: Analyze Valuation Premium/Discount
In the example above:
- IPO P/E (25x) is 25% higher than peer average (20x)
- IPO EV/EBITDA (15x) is 25% higher than peer average (12x)
Question: Is the premium justified?
Step 3: Justify the Difference
Higher valuation may be justified if:
- Higher growth rate (25% vs 15% in this case)
- Better profitability (ROE 22% vs 18%)
- Stronger competitive position
- Better management quality
Step 4: Calculate Fair Value
Using peer average multiple and IPO's earnings:
- Fair P/E value: IPO EPS × Peer Avg P/E
- Compare with IPO price
- Determine overvaluation or undervaluation
Adjusting for Differences
Growth Premium
If IPO is growing faster, some premium is justified:
- Calculate growth premium = IPO growth / Peer growth
- Adjust expected multiple accordingly
- Example: 25%/15% = 1.67x → may justify 20% premium
Size Discount
Smaller companies often trade at discount due to:
- Lower liquidity
- Higher risk
- Less analyst coverage
Quality Premium
Higher ROE/ROCE companies deserve premium:
- Efficient capital use
- Sustainable competitive advantages
- Better management
Common Pitfalls in Peer Comparison
1. Choosing Wrong Peers
- Different business models grouped together
- International peers with different cost structures
- Peers at very different stages of lifecycle
2. Ignoring Business Differences
- Product mix variations
- Geographic exposure differences
- Customer segment differences
3. Point-in-Time Analysis
- Peer valuations fluctuate
- Market conditions affect all valuations
- Consider historical valuation ranges
4. Relying Only on Prospectus Peers
- Companies often select favorable comparisons
- Do independent peer identification
- Include peers not mentioned in prospectus
Tools for Peer Analysis
- Screener.in: Free financial data and screening
- Trendlyne: Peer comparison features
- Moneycontrol: Basic peer data
- BSE/NSE websites: Official financial data
- Annual Reports: Detailed company information
Conclusion
Peer comparison is the most practical valuation method for retail investors. It provides context for whether an IPO is priced fairly. Remember to adjust for genuine differences in growth, profitability, and risk. Don't accept the prospectus peer comparison at face value – do your own analysis with a comprehensive peer set. The goal is not to find the "exact" fair value but to understand if the IPO offers reasonable value compared to alternatives already available in the market.