Hyundai India’s Landmark IPO: A Cautious Approach for Retail Investors
Hyundai India is set to make a historic entry into the Indian stock market with its Initial Public Offering (IPO), scheduled to open tomorrow. The company aims to raise ₹27,870 crore through the offering, making it the largest IPO in Indian market history, surpassing the ₹21,008.48 crore raised by Life Insurance Corporation of India (LIC). Priced between ₹1,865 and ₹1,960 per share, Hyundai’s offering is also the second-largest IPO globally in 2024. While the sheer size of this IPO signals confidence in the Indian market’s ability to absorb large issues, there are several factors investors need to consider before diving in.
Structure of the IPO: Offer for Sale (OFS)
Hyundai’s IPO is structured entirely as an Offer for Sale (OFS), where 142,194,700 shares will be sold by the parent company, Hyundai Motor Company. This will reduce Hyundai Motor’s stake in its Indian arm from 100% to 82.50%. It’s important to note that none of the proceeds from the sale will go toward Hyundai India’s growth or expansion.
While many critics on social media have pointed out that this OFS structure doesn’t contribute to Hyundai India’s future growth, there’s nothing inherently negative about such a setup. Public Sector Undertakings (PSUs) have frequently been listed using this method. However, for growth-focused investors, the lack of new capital being infused into the business may be a drawback.
Valuation Concerns
One of the main criticisms of the IPO is the high valuation. The price band of ₹1,865 to ₹1,960 per share puts Hyundai’s Price-to-Earnings (PE) ratio post-IPO at 26.73. Here’s a look at how Hyundai’s valuation compares to its Indian competitors:
As seen from the table, Hyundai’s post-IPO PE ratio is in line with Maruti Suzuki, but it’s notably higher than Tata Motors, which is trading at a significantly lower PE of 10.15. What’s even more concerning is the disparity in valuations between Hyundai India and its parent company. Hyundai Motor Company in South Korea has a PE ratio of just 4.77, which raises questions about why the Indian arm is being offered at a much higher valuation. This suggests that investors are being asked to pay a premium to buy into Hyundai India’s growth story.
Industry Overview and Competitive Position
Hyundai is India’s second-largest passenger vehicle manufacturer, with a market share of around 15%. Maruti Suzuki remains the dominant player, holding a commanding 43% market share. Despite this gap, Hyundai has emerged as the most efficient player in the Indian automobile sector.
Operational Efficiency
Hyundai’s operational metrics reveal impressive efficiency. The company generates revenue per employee of ₹113.4 million, far surpassing its peers:
– **Hyundai:** ₹113.4 million revenue per employee
– **Maruti Suzuki:** ₹67.9 million
– **Tata Motors (standalone):** ₹43.2 million
– **M&M:** ₹37.9 million
Hyundai also excels in asset utilization, with a net asset turnover ratio nearly double that of its competitors. These figures reflect Hyundai’s strong operational capabilities and its ability to maximize returns on investment.
#### Financial Strength
When comparing key financial metrics like Return on Equity (RoE) and Return on Capital Employed (RoCE), Hyundai outperforms the competition:
RoE:
– Hyundai: 29.3%
– Maruti Suzuki: 16.8%
– M&M: 20.3%
– Tata Motors: Lower due to losses in its passenger vehicle division
RoCE (excluding cash and investments):
– Hyundai: 149.3%
– Maruti Suzuki: 53.6%
– M&M: 53.3%
– Tata Motors: 18.9%
These metrics indicate that Hyundai’s core business is highly profitable, with much better returns compared to its competitors. However, it’s important to remember that these strong returns are already factored into the company’s high valuation, leaving little room for immediate upside.
Concerns Over Royalty Payments–
Another point of contention is Hyundai’s royalty payment to its parent company. Just before the IPO, Hyundai India increased the royalty rate to 3.5%. While some investors viewed this negatively, it’s worth noting that even after the increase, Hyundai’s royalty payments remain lower than Maruti Suzuki’s, which pays around 3.75%. In fact, Maruti’s newer models incur even higher royalties, sometimes up to 5%. Thus, the royalty rate should not be a significant concern for investors, though it does add to the list of reasons why some are adopting a wait-and-watch approach.
Outlook: Wait for Listing and Market Performance
While Hyundai’s IPO represents a landmark event for the Indian stock market, there are valid reasons to remain cautious. The high valuation, combined with the fact that this is an OFS rather than a capital-raising effort for growth, suggests that the IPO may not offer substantial listing gains. Investors betting on short-term profits may be disappointed, especially given the price band, which could deter retail interest.
In terms of long-term growth, Hyundai’s strong operational efficiency and financial performance are clear advantages. However, the Indian automobile market remains highly competitive and price-sensitive. The shift toward electric vehicles (EVs) will be another critical factor in determining Hyundai’s future growth trajectory.
Key Takeaways for Investors:
1. Valuation Concerns Hyundai’s post-IPO PE ratio of 26.73 is in line with competitors like Maruti but significantly higher than Tata Motors. The high valuation might limit immediate upside potential.
2. Efficiency and Profitability: Hyundai’s operational efficiency and high returns on equity and capital employed make it a standout performer in the Indian automobile industry.
3.Royalty Rates: Hyundai’s royalty rate of 3.5% is lower than Maruti’s 3.75%, so it should not be a major concern for investors.
4. Wait-and-Watch Approach:** Retail investors might be better off waiting for the stock to list and track its performance for a few quarters before making any significant investments. The Indian auto sector is price-sensitive, and with the increasing competition, it’s essential to see how Hyundai navigates these challenges.
Final Recommendation
Given the high valuation and the price-sensitive nature of the Indian market, I recommend a cautious approach to Hyundai’s IPO. Retail traders, in particular, should avoid rushing into this offering. Instead, it’s advisable to monitor the company’s performance over the next few quarters before deciding to invest. As the auto industry evolves, particularly with the shift toward electric vehicles, Hyundai’s ability to maintain its operational efficiency and profitability will be crucial.
In conclusion, while Hyundai is a strong player with impressive financials, the current IPO offers little immediate upside. Let the stock settle in the secondary market before making a move.
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