scorecardresearchHow to analyse the optimal unlisted shares? All you need to know

How to analyse the optimal unlisted shares? All you need to know

Updated: 23 Sep 2023, 11:31 AM IST

Investing in unlisted shares has become attractive, but it comes with risks. Investors must analyze factors such as company financials, market trends, and industry growth before investing. Timing the market is challenging, so thorough research is crucial.

Unlisted stock investments have their own set of advantages and risks.

Unlisted stock investments have their own set of advantages and risks.

Unlisted shares are those shares that are not yet listed on the stock market. With emerging start-ups and new-age companies, investment in pre-IPO companies has become attractive amongst investors. For example – Polymatech, Boat, Chennai Super Kings are some popular unlisted stocks.

Unlisted stock investments have their own set of advantages and risks. Before choosing to invest, every investor has to be aware of the risks and returns involved with each sort of investment. They can better organise their money and establish attainable investing goals.

There are various factors to analyse the unlisted stocks which suit the risk appetite of the investors. Some of which are

Analyse the company's business

  • Understand the management's long-term vision & objectives for the business.
  • Analyse the company's revenue sources, revenue mix, and cash flow risk.
  • Evaluate the company’s profit margins and growth proposition.

Find out what is the company’s value proposition

Determine the company's competitive advantage compared to its industry counterparts and what makes its products and services sellable (USP of the company)

Look at the company's valuation

Evaluate price at which the company's unlisted shares are traded in the grey market. Examine whether the relative valuation is higher or lower than that of its listed peers.

Look at the future potential of the company

  • See how the company plans to expand and fund its expansion.
  • Analyse future prospects and growth plans of the company and execution strategy.

Market Trends: Unlisted markets are governed by demand and supply. Positive market news could support a higher valuation and could be a good time to purchase the unlisted stocks, while negative conditions might warrant caution and could be the right time to sell. If there is a huge gap in valuation as compared with its listed peers, the company can perform better.

Analysing the present market valuation for purchasing and selling unlisted shares involves a combination of financial analysis, industry research, and industry growth & outlook assessment.

Factors for purchasing unlisted shares:

Company financials: Find out as much information as possible about the company's financial performance, including revenue, profitability, growth rates, and cash flow.

Industry growth & outlook assessment: Analyse the market sentiment about the company and its industry. Positive news, market trends, and growth potential can influence the perceived value of the shares.

Comparable companies: Look for listed peers in the same industry as the unlisted company. Analyse and compare key financial ratios like price-to-earnings (P/E) ratio, price-to-sales (P/S) ratio, and enterprise value-to-EBITDA (EV/EBITDA) to analyse the current valuation.

Discounted cash flow (DCF): If there is access to the company's financial projections, one can perform a DCF analysis. This involves estimating the present value of future cash flows the company is expected to generate.

Factors for selling unlisted shares:

Change in valuation: Evaluate the purchase price to the recent round of valuation. If a recent round of valuation is not available, compare the past growth vs current growth. If the company's valuation has significantly increased, investors can consider selling some or all of their shares to book profits.

Exit opportunities: Assess Platforms which provide exit opportunities to the investors in quick easy steps at the right price. If the price offered matches up to the current valuation investors can consider selling stocks.

Liquidity: Evaluate the liquidity of the market for the specific shares. If there's demand from potential buyers at the right price, it might be a suitable time to sell.

The right time to invest in unlisted shares is broadly based on the right valuation and market conditions. A positive market news or milestone such as a new development or product launch could lead to substantial price hike or drop for investors and hence such factors can be a good entry point for the investor. For instance, Sterlite power announced demerger of its business from overall group structure which impacted the share price positively. Such positive market news could be a good opportunity for the investors to buy the shares.

The popularity of unlisted shares has grown as a result of the new-age companies being able to reach the necessary threshold for being listed on the stock market. The majority of unlisted stocks are related to start-ups or small businesses. Evidently, small businesses focus more on innovation and development and hence expand more quickly than well-established businesses.

In contrast to investing later, investing in a start-up at an early stage will benefit the investor more because it will result in greater profits and ownership holdings. Early investment in a start-up not only promises higher returns but also makes sure the investor provides guidance and decisions to the business. Every stage that a startup goes through presents different opportunities and risks for investors.

It is important to note that unlisted shares carry an inherent risk and there is no hard and fast rule to determine the correct timing to buy/sell unlisted shares. Timing the markets can be challenging and there is always an element of uncertainty. Thus, investors should aim to invest after thorough research and long-term perspective.

Manish Khanna, Co-founder of Unlisted Assets

How to buy unlisted shares?
First Published: 23 Sep 2023, 11:31 AM IST