The price band is expected to be between Rs 1,825 and Rs 1,885 per share, implying a valuation of 27 times of estimated FY25 earnings, and a slight discount to Maruti Suzuki.
03 Oct 2024 | 2799 Views | By Ashutosh R Shyam and Ketan Thakkar
The much-anticipated initial public offering (IPO) of Hyundai Motor India, the largest in India’s history, is expected to open for investors in mid-October at an estimated valuation of $17.5 billion to $18 billion (around Rs 1.5 lakh crore), followed by a listing by the third week of October.
The ...
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The much-anticipated initial public offering (IPO) of Hyundai Motor India, the largest in India’s history, is expected to open for investors in mid-October at an estimated valuation of $17.5 billion to $18 billion (around Rs 1.5 lakh crore), followed by a listing by the third week of October.
The price band is expected to be between Rs 1,825 and Rs 1,885 per share, translating into an IPO size of around Rs 26,000 crore ($3.15 billion). This is bigger than LIC’s IPO of Rs 21,000 crore two years ago, Paytm’s Rs 18,300 crore offering, and Coal India’s issue of Rs 15,200 crore.
Problem of Plenty
An investment bank closely involved with Hyundai's IPO indicated that strong demand among institutional investors has made it challenging for them to decide on anchor book allocations despite the substantial size of the IPO.
"All the major institutional investors are bidding aggressively, thanks to the reassurance of quality that comes from being an Indian subsidiary of a Korean parent company. This provides significant comfort from a corporate governance perspective and results in high demand, as it becomes a portfolio stock for many large funds," said a senior investment banking source who chose to remain anonymous due to the private nature of the discussions.
An email seeking an official response from Hyundai Motor India is yet to elicit any reply.
Interestingly, in the Ola Electric Mobility IPO, anchor investors put in total bids of between $100 million and $200 million, while allocation was capped at around $30 million. Leading domestic investors such as SBI and HDFC Asset Management Company participated in Ola’s IPO, while Norway’s pension fund and Fidelity were the leading foreign investors in the anchor book.
With superior operating margins compared to Maruti Suzuki and a higher average selling price, there have been discussions about Hyundai Motors potentially being valued higher than India’s largest carmaker, Maruti Suzuki. However, after extensive conversations with anchor investors, it was ultimately decided that to leave more value for investors given the large size of the IPO, Hyundai’s management, headquartered in Seoul, would set the valuation at a discount to Maruti Suzuki.
There are three key reasons why institutional investors may be showing strong interest in the Hyundai Motor IPO.
First, the stock will likely be included in major equity indices such as the MSCI India Index, MSCI Emerging Markets Index, and MSCI Asia Pacific Index in the coming months, making it a mandatory allocation for many foreign investors.
Second, this will be the first time in two decades that an original equipment manufacturer (OEM) exposed to internal combustion engines (ICE) will be listed after Maruti Suzuki.
This presents an attractive alternative for domestic investors, especially as they are witnessing over $7 billion in gross inflows monthly, fueling interest in India's passenger car growth story.
Booming Equity Market
The listing of Hyundai Motor's local subsidiary, which commands a 14.5% market share in India, marks a significant moment for the Indian market. It represents the first instance in nearly four decades that a global company voluntarily chooses to list its local unit.
Hyundai Motor's decision to list its Indian subsidiary aims to reduce the 'Korean discount' applied to its parent company. Korean firms typically trade at lower valuations than their global counterparts due to issues with corporate governance, capital allocation policies, and transparency concerns within family-run conglomerates.
Analysts tracking Hyundai Motor believe that listing its Indian subsidiary is part of the 'Value-up' program to narrow this discount in financial markets. Korean automakers trade at low P/E ratios of 4.1-4.6 times, compared to Japanese and US automakers' average P/E ratios of 7.3 and 5.4, respectively. Hyundai Motors' Indian subsidiary trades at a higher P/E multiple than its parent company.
Hyundai Motor India reported an annualized profit of Rs 5,841 crore for the last fiscal year, extrapolated from nine-month profits disclosed in the DRHP. If the company achieves 10% earnings growth from FY24 to FY27, it could potentially generate profits of around Rs 7,000 crore in FY26, translating to a valuation of 23 times forward earnings, compared to one-third of that for its parent company. Indian automakers typically trade at P/E ratios between 22-28 times.
The Return on Equity (RoE) of Hyundai Motor's Indian unit stood at 29.3% for FY24 (annualized basis), compared to 16.8% for Maruti Suzuki, 20.3% for M&M, and 20.3% for Tata Motors' PV division, according to IIFL.
Operational efficiencies across its manufacturing ecosystem have allowed Hyundai Motor India to maintain robust margins despite macroeconomic fluctuations.
Market Challenges
Despite its high profitability, Hyundai Motor also faces challenges in the dynamic Indian market, particularly due to hyper competition.
The company has retained its No.2 position in the country for almost two decades. Still, in recent years, homegrown car makers Tata Motors and Mahindra & Mahindra have had strong revival and growth.
While Tata Motors has surpassed Hyundai in monthly sales for once or twice n the last couple of years, Mahindra & Mahindra was just 39 units behind Hyundai Motor India’s sales in September 2024.
Hyundai Motor has already announced an investment of Rs 33,000 crore in the Indian market in the coming decade, and a sizable part of the funds will go into the electric vehicle business.
Just last year, the company acquired a General Motors factory in Talegaon on the outskirts of Pune to create an additional capacity of about 2.5 lakh units. This will allow Hyundai to participate in the future growth of the Indian market and increase the company’s total capacity to over 1.1 million units.
Hyundai Motor India has already announced that it will launch about four new electric vehicles, and Autocar Professional understands that the company will also be pursuing the localisation of hybrid solutions, which will require significant investments in the future.