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Always expect the unexpected from Mr Market, and Hyundai's upcoming IPO is a testament to this golden rule. At a time when even weaker listings are debuting at exorbitant premiums, India's largest IPO is struggling to attract investors in the grey market. Hyundai's grey market premium (GMP), which stood at 18 per cent as of October 4, 2024, has now fallen to just 2 per cent.
So, what's worrying high-net-worth individuals (HNIs) and stockbrokers? More importantly, should retail investors take a cue and hold off on betting on the South Korean automaker? While there are no easy answers, a thorough analysis of the concerns may provide some clarity.
The grey clouds over Hyundai
Let's be straightforward: grey markets are speculative and volatile. While GMP can serve as an indicator of market sentiment, it should always be taken with a grain of salt. That said, three key concerns have surfaced that are worth examining:
1. The IPO is just a golden ticket for promoters
Hyundai has long been a cash cow for its South Korean parent. Last year alone, Hyundai paid out a hefty Rs 10,782 crore as special dividends. In addition, the parent company increased royalty fees from 2.2 per cent in FY24 to 3.5 per cent this fiscal year. Some worry that this IPO is more of the same, with the entire issue being an offer for sale (OFS) — meaning none of the funds raised will go into Hyundai's operations.
2. Shrinking market share
Traditionally a budget carmaker in India, Hyundai has felt the pinch of shifting consumer preferences from small, budget cars to SUVs. Its market share dropped from 18 per cent in FY22 to 15 per cent in FY24, raising concerns about its ability to compete in the rapidly changing Indian auto market.
3. High valuations
Hyundai India contributes about 7 per cent of the South Korean parent's revenue but accounts for a significant 42 per cent of its valuations. This discrepancy has sparked concerns that the IPO price might be overvalued.
In short, risks are certainly present. However, our analysis suggests that the fear driving current investor perception may not match the severity of the actual risks. Here's why.
The silver lining
Our belief that the risks are overblown stems from the following factors:
1. A fresh issue was not needed
Between FY22 and FY24, Hyundai India generated around Rs 14,000 crore in cash from operations. The management foresees a capital expenditure of Rs 32,000 crore over the next 10 years, which can comfortably be funded through internal accruals. The sizable offer for sale primarily arose from SEBI regulations requiring a minimum public shareholding.
2. Not a one-sided deal with its South Korean parent
While Hyundai Motors Korea benefits from Hyundai India's cash generation and generous dividends, the Indian subsidiary gets a fair share in return. Hyundai India relies on its parent's extensive R&D capabilities and global sales network. The parent company has invested a whopping Rs 1,85,000 crore in R&D over the past decade, significantly benefiting the Indian arm's product lineup and market competitiveness.
3. Stabilising market share
Though Hyundai was late to the SUV trend, it is now catching up. In FY24, total SUV sales in India grew by 28 per cent, while Hyundai's SUV sales outpaced this, growing by 29 per cent. While the low base effect may have contributed, Hyundai's premium sales are steadily increasing, positioning it to regain lost ground in the market.
4. Valuations may be justified
It's not uncommon for Indian subsidiaries of global giants to trade at higher premiums. This is a characteristic of most emerging markets. Hyundai's P/E ratio of 26x is slightly lower than Maruti's P/E of 27x, indicating that its valuation may not be as excessive as initially feared.
Should you invest?
As always, we advise caution when it comes to investing in IPOs. Our goal here was to highlight the key concerns surrounding the Hyundai IPO and offer a more nuanced view of the situation.
Ultimately, while there are legitimate risks, the current fears may be exaggerated. If you are considering investing, base your decision on the facts and your individual investment strategy, rather than market speculation.
Also read: Mankind Pharma's Rs 10,000 crore debt bet on Bharat Serums
Disclaimer: This content is for information only and should not be considered investment advice or a recommendation.
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