Hyundai IPO analysis

Hyundai IPO, the biggest-ever in the Indian primary market, will open for subscription on October 15, 2024, and close on October 17, 2024. We break down the automobile manufacturer's strengths, weaknesses, and growth prospects to help investors make an informed decision. Hyundai IPO in a nutshell Quality : Its three-year average ROE and ROCE were nearly 27 and 29 per cent, respectively, during FY22-24. Growth : Its revenue and net profit grew nearly 21 and 45 per cent per annum, respectively, during FY22-24. Valuation : Post the IPO, the stock will be valued at a P/E and P/B ratio of around 26 and 13 times, respectively. Overview: Hyundai Motor is India's second-biggest car maker in the passenger vehicle or PV segment after Maruti Suzuki . The company is poised to benefit from the growing demand for PVs in India, particularly in the premium sport utility vehicle or SUV segment. With a shift in consumer preferences towards high-end models, especially among younger buyers, Hyundai has been doubling down to capitalise on this trend. The growing electric vehicle or EV segment will also provide ample opportunities. However, the company is facing intense competition, which is threatening its market position. About Hyundai Motor India Hyundai Motor India is a key subsidiary of the world's third-largest car maker, South Korean giant Hyundai Motor Company (HMC). Hyundai India contributes about 18 per cent to the parent's global sales. With Rs 30,103 crore of investment since inception, it is also the parent's largest supply chain outside South Korea. The company pays the parent a 3.5 per cent royalty on annual sales, consistent with the other global subsidiaries. Company's strengths Capacity ramp-up: Hyundai India's production capacity will increase to 10.7 lakh units from 8.2 lakh units with its upcoming plant in Talegaon, Maharashtra. Operational efficiency: Hyundai sources 93 per cent of its parts locally near its Chennai plant. The proximity to suppliers allows the company to streamline its manufacturing process, reducing inventory costs and improving operational efficiency. Its common platform architecture across its Chennai plants further enables production of multiple models simultaneously, which is why the company had an industry-leading average EBIT margin of nearly 9 per cent during FY22-24. Premiumisation strategy : Hyundai focuses on higher-value vehicles. It earned 49 per cent of revenue from cars priced over Rs 10 lakh and around 20 per cent from cars priced over Rs 15 lakh in FY24. This was a result of capturing the growing demand for SUVs. Their share in company revenue has shot up to 67 per cent so far in 2024, up from 52 per cent in March 2022. Company's weaknesses Receding market share: Intense competition has been eating into the company's market pie. Between FY20 and Q1 FY25, Hyundai's PV market share has fallen from nearly 18 per cent to 15 per cent. Over the same stretch, Tata Motors ' share rose to 13 per cent from around 5 per cent. Mahindra & Mahindra and Kia Motors (also a Hyundai Group company) nearly doubled their market share to 12 and 6 per cent, respectively. Royalty agreement: Hyundai India is obliged to pay royalty fees to its parent, who can increase the fee to 5 per cent without needing shareholder approval. Based on FY24 revenue, a one per cent increase in royalty fee would have cost Hyundai India nearly Rs 700 crore. Any fee increase, therefore, could significantly dent the company's profitability. Hyundai IPO details Total IPO size (Rs cr) 27,870 Offer for sale (Rs cr) 27,870 Fresh issue (Rs cr) - Price band (Rs) 1,865 -1,960 Subscription dates October 15-17, 2024 Purpose of issue