How to Read a DRHP Before Applying for an IPO

A Draft Red Herring Prospectus (DRHP) is one of the most useful documents to read before applying for an IPO in India. It explains the company’s business, financials, risks, promoters, use of IPO proceeds, legal proceedings, and other information that can help you evaluate the offer.

You do not need to read every page from start to finish. For most retail investors, the smarter approach is to focus on a few high-value sections, cross-check the numbers, and look for risks that could materially affect the business after listing.

What Is a DRHP?

A Draft Red Herring Prospectus, or DRHP, is an offer document filed with the Securities and Exchange Board of India (SEBI) before a company launches a public issue.

Think of it as the company’s detailed pre-IPO disclosure document.

A DRHP can contain hundreds of pages covering areas such as:

• Business operations
• Industry overview
• Risk factors
• Financial statements
• Promoters and management
• IPO objectives
• Outstanding litigation
• Related-party transactions
• Capital structure
• Material contracts

It provides prospective investors with considerably more information than an IPO advertisement, a social media discussion, or a grey market premium.

However, a DRHP is still a draft document. Details can change before the IPO opens.

DRHP vs RHP: What Is the Difference?

DRHP and RHP are related, but they are not the same document.

An RHP, or Red Herring Prospectus, is filed closer to the public issue and contains updated information about the offer.

DRHP	RHP
Draft offer document	Updated offer document
Filed earlier in the IPO process	Filed closer to the IPO
Used during SEBI’s review process	Used when the public issue is approaching
Some offer details may not yet be final	Contains more current issue information
Useful for early research	More relevant for the final apply-or-skip decision

If you are deciding whether to apply for an IPO, read the latest RHP as well. Do not rely solely on an older DRHP if more recent disclosures are available.

Where Can You Find an IPO’s DRHP?

You can generally find IPO offer documents through:

• SEBI’s website
• The company’s website
• Stock exchange websites
• Websites of the issue’s merchant bankers or book-running lead managers

Use the official filing rather than relying on a third-party summary.

An IPO summary can show that revenue grew by 30%. The DRHP or RHP can help you understand why it grew, whether profits followed, how much debt the company carries, and what risks management itself is required to disclose.

How to Read a DRHP Before Applying for an IPO

If a DRHP is 400 or 500 pages long, reading from page 1 to the last page is rarely the most efficient approach for a retail investor.

Start with these sections:

1. Risk factors
2. Business overview
3. Objects of the offer
4. Financial information
5. Management and promoters
6. Capital structure
7. Related-party transactions
8. Outstanding litigation
9. Industry information
10. Offer details

Then use keyword searches within the PDF for terms such as debt, litigation, promoter, related party, customer, supplier, contingent liability, negative cash flow, regulatory, default, and proceedings.

1. Start With the Risk Factors

The Risk Factors section is one of the first places you should go.

Companies are required to disclose material risks associated with their business and the offering. These can range from ordinary industry risks to issues that could seriously affect future earnings.

Look for risks involving:

• Dependence on a small number of customers
• Dependence on key suppliers
• Regulatory approvals
• Outstanding litigation
• High debt
• Negative cash flows
• Geographic concentration
• Dependence on promoters or key executives
• Foreign exchange exposure
• Raw material price volatility
• Intellectual property disputes
• Past regulatory action

Do not panic simply because the section is long. IPO documents are supposed to contain detailed risk disclosures.

Instead, ask:

Which risks could materially damage revenue, profit, cash flow, or the company’s ability to operate?

Look for Customer Concentration

Suppose a company earns:

• 38% of revenue from its largest customer
• 61% from its top five customers

That concentration deserves attention.

Losing one large customer could materially affect revenue even if the company’s overall industry is growing.

Compare concentration across multiple financial years. A falling percentage can indicate diversification, while a rising percentage of dependence warrants a closer look.

2. Understand What the Company Actually Does

Next, read the Our Business or equivalent business overview section.

By the end of it, you should be able to explain in simple language:

• What does the company sell?
• Who pays it?
• How does it make money?
• What are its major costs?
• Where does it operate?
• Who are its customers?
• What gives it an advantage over competitors?
• What could disrupt its business?

If you cannot explain how the company makes money after reading the section, be cautious about investing solely on IPO hype.

Look Beyond the Company’s Strengths

DRHPs typically include sections that describe competitive strengths.

These can be useful, but remember that they are the issuer’s description of its own advantages.

If the document says the company has a “strong market position,” look for evidence.

For example:

• Market share
• Customer retention
• Distribution reach
• Manufacturing capacity
• Brand recognition
• Revenue growth
• Margins
• Return ratios

Prefer measurable evidence over adjectives.

3. Check Why the Company Is Raising Money

The Objects of the Offer section tells you what the IPO is intended to accomplish.

This is one of the most important parts of a DRHP.

An IPO can contain:

• Fresh issue
• Offer for Sale (OFS)
• Or a combination of both

These structures have very different implications.

What Is a Fresh Issue?

In a fresh issue, the company issues new shares and receives the proceeds after applicable issue expenses.

The money may be used for:

• Repaying debt
• Building manufacturing facilities
• Capital expenditure
• Working capital
• Acquisitions
• Investment in subsidiaries
• General corporate purposes

Suppose a company raises ₹1,000 crore through a fresh issue and plans to use ₹600 crore to repay borrowings.

That could reduce interest costs and strengthen its balance sheet.

But you still need to ask why the company accumulated that debt and whether the underlying business generates enough cash.

What Is an Offer for Sale?

In an Offer for Sale, existing shareholders sell their shares.

The proceeds from those shares go to the selling shareholders, not to the company.

For example:

₹1,000 crore IPO

• ₹300 crore fresh issue
• ₹700 crore OFS

Only the fresh issue portion represents new capital raised by the company, before relevant expenses.

The ₹700 crore OFS allows existing shareholders to sell part of their holdings.

Is a Large OFS a Red Flag?

Not automatically.

Promoters, private equity funds, venture capital investors, and other shareholders may use an IPO to partially exit after holding an investment for years.

Instead of treating every OFS as negative, ask:

• Who is selling?
• How much are they selling?
• What will their ownership be after the IPO?
• Is the promoter significantly reducing exposure?
• Is the company itself receiving enough capital for its stated needs?

Context matters more than the existence of an OFS.

4. Read the Financial Statements

Next, move to the financial information.

At minimum, compare the company’s performance across the available historical periods.

Focus on:

• Revenue
• EBITDA or operating profit, where relevant
• Profit after tax (PAT)
• Operating cash flow
• Total borrowings
• Net worth
• Earnings per share
• Trade receivables
• Inventory
• Contingent liabilities

Do not judge an IPO using revenue growth alone.

Check Revenue Growth

Suppose revenue looks like this:

Financial year	Revenue
FY1	₹800 crore
FY2	₹1,050 crore
FY3	₹1,400 crore

That is strong top-line growth.

Now compare profit:

Financial year	PAT
FY1	₹80 crore
FY2	₹82 crore
FY3	₹85 crore

Revenue has grown substantially faster than profit.

That should lead to another question:

Why are margins not improving with scale?

Possible explanations include rising raw material costs, employee expenses, marketing expenditure, finance costs, or competitive pricing pressure.

Check Profit Margins

A simple net profit margin calculation is:

Net profit margin = PAT ÷ Revenue × 100

If PAT is ₹100 crore on revenue of ₹1,000 crore:

₹100 crore ÷ ₹1,000 crore × 100 = 10%

Track this over multiple years.

Rising revenue with falling margins can indicate that growth is becoming more expensive.

5. Compare Profit With Cash Flow

One of the most useful checks in a DRHP is comparing reported profit with cash flow from operating activities.

A company can report accounting profits without generating equivalent cash.

For example:

Year	PAT	Operating cash flow
FY1	₹100 crore	₹92 crore
FY2	₹130 crore	₹55 crore
FY3	₹160 crore	-₹20 crore

Profits look excellent.

Cash generation looks much weaker.

This does not automatically mean something is wrong, but it demands investigation.

Why Can Profit and Cash Flow Differ?

Common reasons include:

• Customers taking longer to pay
• Inventory accumulation
• Changes in working capital
• Supplier payment timing
• Rapid business expansion
• Accounting adjustments

Search the financial statements and management discussion for the explanation.

Repeatedly negative operating cash flow alongside rising accounting profits deserves particularly close attention.

6. Check the Company’s Debt

Look at total borrowings and finance costs.

Then ask:

• Is debt increasing or decreasing?
• How much debt is short-term?
• What interest rate does the company pay?
• Is IPO money being used to repay borrowings?
• Has the company previously defaulted or delayed payments?
• Does operating cash flow comfortably support debt obligations?

Debt itself is not automatically bad.

A manufacturing business may reasonably use more debt than an asset-light software company. Compare leverage with businesses that have similar economics.

Useful Debt Ratios

One commonly used metric is:

Debt-to-equity = Total debt ÷ Shareholders’ equity

Suppose:

• Debt = ₹500 crore
• Equity = ₹1,000 crore

Debt-to-equity is:

0.5x

Do not evaluate this ratio in isolation. Industry norms and the company’s ability to service its debt matter.

7. Examine Promoters and Management

An IPO means you are buying into a business run by real people.

Read the sections covering:

• Promoters
• Directors
• Key managerial personnel
• Senior management
• Promoter group

Look at their:

• Experience
• Educational and professional background
• Other directorships
• Compensation
• Shareholdings
• Past businesses
• Regulatory or legal disclosures

Check Promoter Ownership Before and After the IPO

A significant reduction in promoter ownership is not automatically negative, but you should understand why it is happening.

Compare:

Pre-IPO promoter holding → Post-IPO promoter holding

Also check whether promoter shares are pledged or otherwise encumbered where such disclosures are applicable.

8. Look Closely at Related-Party Transactions

A related-party transaction occurs when the company conducts business with parties connected to promoters, directors, subsidiaries, associates, or other related entities.

These transactions can be legitimate.

What matters is their scale, nature, and terms.

Look for:

• Sales to promoter-linked companies
• Purchases from related entities
• Loans or advances
• Guarantees
• Property transactions
• Management or service fees
• Large payments to related businesses

Then compare the amounts with total revenue, expenses, assets, or profits.

A ₹5 crore related-party transaction means something very different for a ₹50 crore company than for a ₹50,000 crore company.

9. Check Outstanding Litigation and Regulatory Issues

Do not skip the Outstanding Litigation and Material Developments section.

Look for proceedings involving:

• The company
• Promoters
• Directors
• Subsidiaries
• Group companies, where disclosed

Pay attention to:

• Tax disputes
• Criminal proceedings
• Regulatory action
• Environmental cases
• Intellectual property disputes
• Customer or supplier claims
• Labour disputes

Again, the existence of litigation does not automatically make an IPO unattractive.

Large businesses commonly face legal disputes.

The useful questions are:

How large is the potential financial exposure, and could the dispute materially affect the business?

10. Examine Contingent Liabilities

Contingent liabilities are potential obligations that may become actual liabilities depending on future events.

Examples can include:

• Tax disputes
• Guarantees
• Legal claims
• Regulatory matters

Compare contingent liabilities with:

• Net worth
• Annual profit
• Cash balance
• Total assets

Suppose a company earns ₹100 crore annually but has a ₹900 crore disputed claim on materials.

That deserves much more attention than a ₹2 crore dispute.

11. Study the Company’s Competitive Position

A DRHP usually contains an industry section with market data, growth forecasts, competitors, and trends.

Use it to understand:

• Industry size
• Expected growth
• Key competitors
• Market share
• Entry barriers
• Regulatory environment
• Demand drivers

But read industry forecasts critically.

A fast-growing industry does not guarantee that every company operating in it will generate good shareholder returns.

Ask Whether Growth Is Sustainable

If the company has doubled revenue in three years, investigate what drove it.

Was growth caused by:

• Higher volumes?
• Higher prices?
• Acquisitions?
• Geographic expansion?
• One large customer?
• Temporary demand?
• A new product?
• Government incentives?

Understanding the source of growth helps you judge whether it can continue.

12. Check Customer and Supplier Concentration

Customer concentration tells you how dependent a company is on a handful of buyers.

Supplier concentration indicates how dependent a company is on particular sources of raw materials or services.

Suppose the top 10 customers generate 75% of revenue.

A major customer leaving could have a serious impact.

Similarly, if a company depends on a single overseas supplier for a critical component, geopolitical disruptions or import restrictions could affect production.

Search for terms such as:

“top customers,” “largest customer,” “suppliers,” “dependence,” “concentration,” and “raw materials.”

13. Check Working Capital Requirements

Working capital is especially important for businesses that hold substantial inventory or offer customers long credit periods.

Look at:

• Trade receivables
• Inventory
• Trade payables
• Working capital borrowings

Suppose sales rise 20%, but receivables rise 70%.

Customers may be taking longer to pay.

That can strain cash flow even while the income statement shows growing revenue.

14. Look at Capital Expenditure Plans

If IPO proceeds are being used for expansion, examine exactly what the company plans to build or buy.

Ask:

• How much will the project cost?
• How much is funded by IPO proceeds?
• Has land been acquired?
• Have necessary approvals been obtained?
• When is the project expected to become operational?
• Will it immediately generate revenue?
• Is existing capacity already well utilised?

An ambitious expansion plan sounds attractive, but unused capacity can reduce returns if demand does not materialize.

15. Check IPO Valuation Using the Final Price Band

A DRHP helps you understand the business, but you generally cannot make a complete valuation judgment from the DRHP alone because the final IPO pricing may not yet be available.

Once the price band and updated offer documents are available, evaluate valuation metrics such as:

• Price-to-earnings ratio (P/E)
• Price-to-book ratio (P/B), where relevant
• Enterprise value to EBITDA (EV/EBITDA), where relevant
• Market capitalisation
• Valuation relative to listed peers

Example of IPO P/E

Suppose the post-issue earnings per share is ₹20 and the IPO price is ₹300.

P/E = ₹300 ÷ ₹20 = 15x

If comparable listed companies trade around 12x earnings, the IPO appears more expensive on this simple measure.

But that does not automatically make it overpriced.

The company may have:

• Faster growth
• Higher margins
• Lower debt
• Better return ratios
• Stronger competitive advantages

Valuation needs context.

16. Compare the IPO With Listed Peers

Most investors do not have to evaluate a company in isolation.

Check the peer comparison section and independently examine listed competitors.

Compare:

Metric	IPO company	Peer A	Peer B
Revenue growth	25%	15%	20%
Net margin	12%	16%	10%
ROE	18%	22%	15%
Debt-to-equity	0.8x	0.3x	1.0x
P/E	30x	24x	28x

The question is not simply whether the IPO has a lower P/E.

Ask whether its growth, profitability, financial strength, and business quality justify the valuation.

17. Read the Basis for Issue Price

When available in the relevant offer documents, the Basis for Issue Price section can help you understand how the issuer presents its valuation.

It may include metrics such as:

• Earnings per share
• P/E ratio
• Return on net worth
• Net asset value
• Comparison with industry peers

Do not treat the section as an independent recommendation.

Use the data as a starting point and make your own comparison with publicly traded companies.

18. Do Not Ignore Dilution

A fresh issue creates new shares.

That means existing ownership gets diluted.

Check the company’s capital structure before and after the issue, particularly if the IPO includes a substantial fresh issue.

Also examine:

• Pre-IPO placements
• Employee stock options
• Convertible securities
• Outstanding options
• Shares issued shortly before the IPO

The capital structure section can reveal how ownership has changed leading up to the listing.

19. Search the DRHP for These Keywords

You can speed up your DRHP analysis considerably by searching the PDF rather than reading every page sequentially.

Useful keywords include:

• negative cash flow
• indebtedness
• default
• litigation
• regulatory
• contingent
• related party
• promoter
• pledge
• top customer
• supplier
• concentration
• working capital
• receivables
• material weakness
• proceedings
• penalty

Read the surrounding paragraphs rather than judging a company from a search result alone.

A 15-Minute DRHP Checklist for Retail Investors

If you have limited time, use this order:

First 5 Minutes: Understand the Business

Check:

• What the company sells
• Revenue model
• Major customers
• Key markets
• Main competitors

You should understand how money enters the business before looking at valuation.

Next 5 Minutes: Check the Numbers

Compare:

• Three-year revenue trend
• Profit trend
• Margins
• Operating cash flow
• Debt
• Receivables
• Return ratios

Look for inconsistencies rather than focusing on one impressive number.

Final 5 Minutes: Look for Problems

Read or search:

• Risk factors
• Litigation
• Related-party transactions
• Customer concentration
• Promoter disclosures
• Objects of the offer
• Fresh issue vs OFS

If something looks unusual, that is where your deeper research should begin.

DRHP Red Flags to Investigate Before an IPO

No single red flag automatically means “do not apply.”

But a combination of concerns deserves scrutiny.

Watch for:

• Revenue rising while operating cash flow remains consistently weak
• Large customer concentration
• Rapidly rising receivables
• Significant promoter selling
• Heavy related-party transactions
• Large contingent liabilities relative to net worth
• Material litigation or regulatory proceedings
• High debt without strong cash generation
• IPO proceeds largely going to an OFS when the company itself needs capital
• Large share issuances shortly before the IPO at significantly different valuations
• Aggressive expansion despite low existing capacity utilization
• Falling margins despite strong revenue growth

Treat these as investigation prompts, not automatic verdicts.

DRHP Analysis: An Example

Consider a fictional company preparing for an IPO.

Its DRHP shows:

• Revenue increased from ₹600 crore to ₹1,100 crore in three years
• PAT increased from ₹50 crore to ₹80 crore
• Operating cash flow fell from ₹45 crore to ₹10 crore
• Receivables doubled
• One customer contributes 32% of revenue
• Debt stands at ₹400 crore
• ₹250 crore of fresh IPO proceeds will repay debt
• Promoters are also selling shares through an OFS

The revenue headline looks attractive.

But a careful DRHP reader would ask:

Why has cash generation weakened while profit increased?

Why have receivables grown so quickly?

How vulnerable is revenue if the largest customer leaves?

Will debt repayment materially improve profitability?

How much promoter ownership remains after the OFS?

Those questions tell you much more than simply knowing that revenue grew 83%.

Should You Apply for an IPO Based Only on the DRHP?

No.

A DRHP is an important research source, but your final IPO decision should also consider updated offer documents, the final price band, valuation, current financial information, listed peers, and any material developments disclosed after the DRHP.

Avoid treating grey market premium (GMP) as a substitute for fundamental analysis.

GMP is an unofficial market indicator. It does not tell you whether the company’s profits are backed by cash, whether its valuation is reasonable, or whether major business risks exist.

The DRHP and RHP give you information that can help answer those questions.

FAQs About Reading a DRHP

Key Takeaways

• A DRHP is one of the most detailed sources available for researching an Indian company before its IPO.
• Start with risk factors, business operations, objects of the offer, financials, promoters, litigation, and related-party transactions.
• Separate the fresh issue from the OFS because only the fresh issue brings new capital into the company.
• Compare revenue and profit growth with operating cash flow. Accounting profit without healthy cash generation deserves investigation.
• Check debt, customer concentration, receivables, contingent liabilities, and promoter ownership.
• Use the latest RHP and final IPO pricing information before making your final valuation assessment.
• Compare the IPO company with relevant listed peers rather than analyzing valuation in isolation.
• Treat DRHP red flags as reasons to investigate further, not automatic reasons to reject an IPO.