The strong response to Hyundai's mega IPO is proof that Indians have developed a taste for the Korean way of doing things.
09 Oct 2024 | 374 Views | By Ashutosh Shyam
K-dramas and K-pop are gaining widespread popularity among Indian audiences, aided by OTT platforms like Netflix, which is expanding its Korean content with subtitles. This rise is driven by a shared connection to stories rich in subtle emotions and tender, character-driven narratives.
While OTT shows like "Crash Landing on ...
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K-dramas and K-pop are gaining widespread popularity among Indian audiences, aided by OTT platforms like Netflix, which is expanding its Korean content with subtitles. This rise is driven by a shared connection to stories rich in subtle emotions and tender, character-driven narratives.
While OTT shows like "Crash Landing on You" have successfully tapped into the emotional chords of viewers in recent times, few recall that Korean brands like Hyundai penetrated the psyche of Indian consumers nearly three-decades ago. Hyundai and sister company Kia have employed an innovative strategy by offering more features and comfort at a reasonable price, which has paid off handsomely. Today, they hold nearly one-fifth of the domestic passenger car market.
The growing influence of Korean brands is evident from the strong response to Hyundai Motor India's $3 billion IPO. What distinguishes Hyundai's IPO from other large IPOs is the lack of any apprehension or uncertainty about how such a substantial equity supply will be absorbed by Dalal Street. Historically, large IPOs have often drained liquidity, dampening market sentiment, as seen in cases like LIC, Paytm, and Reliance Power, which led to market corrections.
Contrary to this trend, market sentiment ahead of Hyundai's IPO is encouraging, with minimal concerns about any negative impact from the large equity supply. This is because institutional investor demand for Hyundai shares far exceeds supply. There are several reasons why investors are flocking to Hyundai India.
It's not just due to the company's strong financial performance in recent years, but also because of the ecosystem Korean carmakers have built in India. They have successfully customised global technologies to suit local tastes and have become essential players in the Indian passenger car market despite fierce competition from Japanese automaker Maruti Suzuki and domestic giants Tata Motors and Mahindra & Mahindra.
Hyundai has excelled in understanding Indian consumer behavior, consistently meeting their expectations. Only a few Hyundai models have failed to meet sales targets. Consumer expectations were further elevated with the launch of Kia models in India, many of which have been highly successful.
This success makes Hyundai India a direct play on India's premiumisation story, where the rising average selling price has become a key driver of earnings growth for Indian automakers. There is ample room for growth in India, as car penetration is still only 30-34 vehicles per thousand people—about one-fifth of the global average.
So, what did Hyundai do right in India? Early in its operations Hyundai realised it couldn't compete directly with the cost-effective Maruti Suzuki. Instead, it focused on loading its cars with additional features and comfort, leveraging its global R&D to disrupt the market with industry-first practices, raising the aspiration levels of potential buyers.
This approach began with the Santro, featuring a multi-point fuel injection system, which attracted many buyers accustomed to the Maruti 800. Hyundai's strategy was to offer features in a segment that were usually found in higher segments, but at a reasonable price. This encouraged consumers to upgrade for better features while limiting any downgrading, as the price gap was still significant. Additionally, in 2004, Hyundai introduced a four-year or 80,000-kilometer warranty for the first time.
The success of this strategy lies in the fact that vehicles sold in India are designed by Hyundai's global R&D center, ensuring globally-consistent design quality while benefiting from global trends in automobile manufacturing. Hyundai's India R&D center in Hyderabad collaborates with the centralised hub in Namyang, Korea.
This setup keeps development costs low, allowing the company to price products competitively and expand its target audience. In contrast, Maruti Suzuki has spent around 0.6% of its revenue on R&D over the past three fiscal years, while Hyundai's global R&D support allows it to spend significantly less.
Hyundai's reliance on its global supply chain is evident, with related-party transactions accounting for about one-third of its production costs. In FY23, Hyundai Motor India sourced parts worth ₹16,159 crore from related parties, according to its DRHP filing. This increased to ₹14,922 crore in the first nine months of FY24, accounting for 33% of its cost of goods sold. Moreover, sales to Kia India, primarily engines, made up more than half of Hyundai Motor India's total sales.
Hyundai's access to global technology is expected to be a key advantage, especially as the internal combustion engine (ICE) market faces challenges from electric vehicles (EVs). Hyundai's parent company in Seoul has set a goal of selling 2 million EVs by 2030, which would constitute about one-third of its total production.
The company's commitment to EV technology is demonstrated by the development of the E-GMP platform, designed exclusively for EVs. This platform integrates the vehicle's chassis, battery, motor, and power systems, with a scalable wheelbase to accommodate different vehicle types. Hyundai has also formed a joint venture with SK Innovation to manufacture battery cells in Georgia, with a production capacity of 35 GWh, enough to produce around 300,000 units annually.
However, Hyundai's reliance on its parent company comes with some drawbacks. Indian subsidiaries are required to pay substantial royalties to the global parent, with Hyundai Motor India paying between 2.3% and 2.7% of sales in recent years. This will increase to 3.5% in the current fiscal year, indicating a growing dependence on the global parent. This rising royalty burden could negatively impact the operating profit margins of Hyundai's Indian arm, particularly as EV penetration increases.
Hyundai was one of the first automakers to identify opportunities in India's passenger car market. For example, the launch of the Creta in 2015 catered to owners of Swift and Dzire models looking for an upgrade. Maruti didn't have a comparable product at the time, which drove some die-hard Maruti buyers to Hyundai.
This was followed by the launch of the Venue for those looking for sub-four-meter vehicles, and in the last fiscal year, Hyundai introduced the Exter, targeting the micro-SUV segment. Hyundai's strong focus on the fast-growing UV segment is evident, with UV domestic sales rising 88% annually to 388,725 units in FY24, while total domestic sales grew only 4.92%. The UV segment's share of Hyundai's total domestic volume grew from 23% five years ago to 63% in FY24.
However, Hyundai now faces challenges as sales volumes for the Creta and Venue have plateaued. In FY24, Creta sales were only 12,401 units higher than the previous year, while Venue sales grew by just 8,244 units. The limited availability of high-volume new products and constrained production capacity could limit future growth for Hyundai's Indian operations. Globally, Hyundai's sales volume is expected to grow by only 1.3% in 2024, with India accounting for 14% of Hyundai's global sales in 2023. Additionally, Hyundai and Kia compete for the same UV market segment in India, which is affecting Hyundai's market share, as Kia focuses solely on UV products.
Korean carmakers have also emphasised asset utilisation to maximise returns. Hyundai has steadily increased its installed capacity by addressing bottlenecks, raising its total capacity to 824,000 units, despite India's passenger vehicle market reaching nearly 4.2 million in FY24.
Major capacity expansion is expected in 2026 with the commissioning of a newly acquired GM plant in Maharashtra. Hyundai's RoCE (Return on Capital Employed), excluding cash and investments, was 149% in FY24, according to IIFL Securities. Hyundai's net fixed asset turnover ratio is nearly double that of its peers, showcasing the efficiency of its Indian operations.
For Hyundai and Kia to sustain their success in India, they will need to effectively introduce cost-competitive EV and hybrid models without sacrificing profitability.