IPO Valuation Peer Comparison: How to Read the Basis for Issue Price Section

Every IPO prospectus has a section that most retail investors scroll straight past, and it happens to be the one where the company tries to justify its price. It’s called “Basis for Issue Price” (some documents say “Basis for Offer Price”), and the heart of it is a table that lines the company up against listed rivals. An IPO valuation peer comparison is exactly that: putting the issuer’s P/E, return on net worth, net asset value and operating numbers side by side with similar listed companies, so you can see whether the price band is asking for a premium, a discount or something in between.

The table looks objective. It isn’t always. The company and its bankers choose the peers, and a single well-placed expensive peer can make an ordinary price look cheap. This guide explains what SEBI requires in that section, how to read the numbers, and how to rebuild the comparison yourself with a worked example.

What SEBI makes the issuer disclose

The rules sit in the SEBI ICDR Regulations, the rulebook for public issues. According to SEBI’s November 2022 board memorandum on KPI disclosures, para 9(K) under Part A of Schedule VI already required issuers to disclose four key accounting ratios in this section: earnings per share (EPS), price to earnings (P/E), average return on net worth (RoNW) and net asset value (NAV). They also have to compare those ratios with industry averages and with a peer group of companies of comparable size in the same industry, and name the source of the peer and industry figures.

The illustrative format in that memo is worth knowing because almost every RHP follows it:

• Basic and diluted EPS for the past three financial years, year by year, plus a weighted average.
• P/E in relation to the issue price, worked out on the latest financial year’s EPS, alongside the industry P/E shown as high, low and average.
• RoNW for the past three years and a weighted average.
• NAV per share, before and after the issue.

Then the memo admits the obvious problem. These traditional ratios become, in SEBI’s word, “redundant” when the company hasn’t turned profitable yet. A loss-making company has no meaningful P/E, so a P/E comparison tells you nothing. That gap is what the 2022 changes were meant to fill.

The 2022 additions: KPIs and past deal prices

After a consultation paper put out on February 18, 2022, SEBI’s board approved two big additions to this section. The law firm Khaitan & Co’s note on the November 2022 ICDR amendment lays out what changed.

First, key performance indicators. The issuer has to disclose all the KPIs it shared with its investors in the three years before filing the offer document, plus any other material KPIs that had a bearing on the price. Each KPI needs audit committee approval and a certificate from the statutory auditor or a peer-reviewed chartered or cost accountant. And the KPIs must be compared with Indian and/or global listed peers, where “peers” means companies of comparable size, in the same industry, with a similar business model. The company also has to keep reporting those KPIs after listing, at least once a year, for at least a year or until the IPO money is used up, whichever is later.

Second, what earlier investors paid. The issuer must disclose the price per share in primary issues (excluding ESOPs and bonus shares) and in secondary deals involving promoters, the promoter group, selling shareholders or shareholders with a right to nominate directors, during the 18 months before filing. Only deals of at least 5% of the fully diluted paid-up capital count, either in one go or across transactions within 30 days. If there were none, the company has to show its last five primary or secondary transactions from the previous three years, whatever their size.

From those deals comes the weighted average cost of acquisition, or WACA. The price band advertisement has to show the floor and cap price as a multiple of WACA, and a committee of independent directors has to state that the price band is justified on the KPIs and ratios disclosed, compared with that WACA.

The peer table is chosen by the people selling the shares. Read it as their argument, not as a neutral benchmark.

How the issue price is actually set

It helps to remember what SEBI itself says about pricing. The same board memo notes that SEBI runs a disclosure-based regime and “cannot dictate IPO pricing”. The issuer fixes the price band with its book running lead managers. The memo lists the factors that usually drive it: traditional financial parameters like P/E, NAV, RoNW, revenue and profit; trends in KPIs; valuations from earlier funding rounds; and market conditions.

One more rule matters for how you read the section. Companies are not allowed to market an issue with projections of future financials or KPIs, so everything in “Basis for Issue Price” is backward-looking. When an IPO is priced at a big premium to peers, the case for that premium is usually growth that the document can’t put a number on. You have to judge that part yourself.

IPO valuation peer comparison: a worked example

Let’s make this concrete. Everything below is a hypothetical company with made-up numbers, built to show the method. It’s not based on any real issue.

Say Company X, a packaged-foods maker, comes out with a price band of ₹380 to ₹400. Its diluted EPS for the latest financial year is ₹12.50. The RHP lists three listed peers.

The peer average P/E is (45 + 28 + 36) ÷ 3 = 36.3x. At the cap, Company X is priced at 32.0x, so the pitch writes itself: “priced at a discount of about 12% to peers”. The maths checks out, since 32.0 ÷ 36.3 is roughly 0.88.

Now look at who’s in the group. Peer A is the market leader, five times the size of Company X, with a higher RoNW. Market leaders can command richer multiples simply because they lead. Is that a fair benchmark for a smaller company? SEBI’s own definition talks about companies of comparable size. Drop Peer A and the average of the two similar-sized peers is (28 + 36) ÷ 2 = 32.0x. Company X at the cap is now priced exactly in line with its real peers, not at a discount.

Then compare quality. Company X’s RoNW of 18.2% sits between Peer B’s 14% and Peer C’s 19%. So on returns it’s a middling business, and a middling multiple of 32x looks fair rather than cheap. That’s a very different conclusion from “12% discount”, and we got there with arithmetic you can do on a phone.

Add the WACA check

Now suppose the RHP shows a WACA of ₹210 for primary issuances in the last 18 months and ₹260 for secondary transactions. The cap price is then 400 ÷ 210 = 1.90 times the primary WACA and 400 ÷ 260 = 1.54 times the secondary WACA. At the floor, the multiples are 1.81 and 1.46 times.

That doesn’t automatically mean the IPO is overpriced. Businesses grow, and a pre-IPO round from a year ago may have been struck when profits were much lower. But it does tell you how much richer the public is paying than the investors who came in shortly before. The RHP has to explain that gap, so read that explanation closely. If profits have nearly doubled since the funding round, a 1.9x jump in price is easy to follow. If profits are flat, it isn’t.

A discount to peers means little if the peer average was pulled up by a company twice the size and twice as profitable.

A checklist for reading the peer table

Here is how we’d go through the section in any RHP:

1. Check who the peers are. Look at their size, business mix and margins. One market leader or one high-growth outlier can drag the average up. Work out the average with and without it.
2. Use the median, not just the average. With three or four peers, one extreme number moves the mean a lot. The median is harder to game.
3. Match the basis. The issuer’s P/E is on the latest full financial year’s EPS. Peer P/Es may use a different date or trailing earnings. Note the source and date the RHP quotes.
4. Look at returns alongside multiples. A higher P/E for a higher RoNW is normal. A higher P/E with a lower RoNW needs a reason.
5. Read the KPI comparison. For consumer tech or platform businesses, the operating KPIs often matter more than P/E. Check that they’re defined the same way for the issuer and the peers.
6. Compare the price band with WACA. Then read the explanation for the gap and see if the financials back it up.
7. Check post-issue NAV. Price divided by post-issue NAV per share gives you a price-to-book number to set against peers, which matters most for lenders and asset-heavy businesses.

Where this method falls short

Peer comparison is a relative tool. Investopedia’s guide to comparable company analysis describes it as building a peer group of similar companies of similar size, then using multiples such as EV/EBITDA, P/E, P/B and P/S to judge whether a company looks expensive or cheap against them. The weakness is built in. If the whole sector is expensive, an IPO priced “in line with peers” is expensive too. Relative value tells you nothing about whether the group itself is fairly priced.

That’s why analysts pair comps with an intrinsic method like discounted cash flow, and why it helps to know the sector’s history. A peer group that has rerated sharply over the last year deserves more caution, not less.

There’s also the loss-making company problem. When there are no earnings, the table shifts to KPIs and sometimes revenue multiples. Those can be useful, but they are easier to dress up. The 2022 rules help here, because the KPIs must be audited, certified and consistent with what was shown to earlier investors. Still, read the definitions carefully.

Putting it to use

If you’re working through an upcoming issue, start with the price band, which our guide to the price band in an IPO explains. Then check how much of the issue is fresh money and how much is existing holders selling, covered in fresh issue vs offer for sale. A big offer for sale at a high multiple to WACA is a signal worth weighing. For the full process from application to listing, see our pillar guide on IPO investing in India.

The short version: don’t accept the “discount to peers” line as given. Rebuild the peer group, look at returns next to multiples, compare the band with what insiders paid, and decide for yourself whether the price is fair.

Disclaimer: This article is for information and education only and is not investment advice. The worked example uses a hypothetical company and hypothetical numbers. Please read the offer document and consult a SEBI-registered adviser before making any investment decision.