Why Do Companies Turn Profitable Right Before IPO?

In the world of Indian stock markets, there's a building that holds dreams, numbers — and maybe even a little bit of magic.

We're talking about the Bombay Stock Exchange (BSE) — Asia's oldest stock exchange and the birthplace of many public listings.

But here’s a pattern smart investors are noticing:
Companies that were loss-making for years somehow become "profitable" just before they go public.
Is it luck? Strategy? Or something more?

Let’s explore this curious phenomenon and what it means for your money.

The IPO Glow-Up: When Losses Magically Turn to Profits

In the run-up to an Initial Public Offering (IPO), many companies that have been in the red suddenly report a profit in the year or two before listing.

Coincidence? Not really.

Here’s how it often works:

• One-time revenue adjustments: Selling an asset or tweaking accounting policies can boost profits temporarily.

• Aggressive cost-cutting: Slashing marketing or R&D just to show short-term gains.

• IPO Window Dressing: Showing better numbers to attract investors and achieve higher valuations.

While not always illegal, these tactics are often misleading.

Real Examples: Who Did It?

Let’s not name names for legal reasons, but financial analysts and retail investors often point to companies in:

• Tech startups with years of cash burn suddenly flipping a profit

• NBFCs or fintech firms changing provisioning policies before IPO

• Manufacturing firms revaluing inventory or capital assets to show gains

Search Reddit threads, X (Twitter), or IPO analysis platforms and you’ll find investors saying:
“Yeh toh listing ke liye hi profit dikhaya hai.”

Why Should Retail Investors Be Careful?

As a retail investor, this BSE magic might look attractive, but it can be risky.

Here’s why:

1. Unsustainable Profits: If the profits aren't from real business growth, they might not last.

2. Overvaluation Risk: If the company is priced based on temporary numbers, you could overpay.

3. Post-IPO Reality Check: Many stocks crash after listing when the true financials emerge.

Always dig into the DRHP (Draft Red Herring Prospectus) and see 3–5 years of financials, not just the latest year.

What to Look For Before Investing in Any IPO

Before you put your hard-earned money into an IPO, check for:

• Consistent Revenue Growth (not just one good year)

• Profit from core operations, not from asset sales

• Debt Levels and how they plan to use IPO funds

• Promoter stake post-listing (Are they exiting?)

Pro Tip: Use platforms like Screener.in or Tofler to compare profit trends over years — not just the shiny latest quarter.

Red Flags You Shouldn’t Ignore

• Sudden turnaround in margins before IPO

• Negative cash flow but positive net profit (means non-cash tricks)

• Promoters selling large chunks in IPO

• Unclear or vague future plans in prospectus

Remember: Past losses + sudden profits = Investigate deeply.

Post-IPO Performance: Does the Magic Last?

Here’s the cold truth:

Many of these “turned-profitable-just-in-time” companies struggle to keep up the numbers.
In some cases, the stock drops 30–50% within months.

Only those with solid business models and real demand sustain growth.

But yes — some do go on to become unicorns. So due diligence is key.

Want to read more? Check out our different blogs:

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