Hyundai Motor India IPO: GMP Drops 92% Ahead of Listing

The IPO (initial public offering) of Hyundai Motor India Ltd (Hyundai) commences on October 15 and concludes on October 17, 2024. Set to be India's largest IPO, the offering has attracted significant interest, with most brokerages recommending a “Subscribe” rating. 

However, investors need a clear understanding of both potential rewards and risks before subscribing. The grey market premium (GMP) for the IPO has significantly dropped from a high of Rs 570 on September 27 to just Rs 45 now. This IPO analysis provides a comprehensive review to help make an informed decision.

Hyundai Motor IPO Details

• Issue Size: Rs 27,870.16 crore
• Price Band: Rs 1865 – Rs 1960 
• Lot Size: 7 shares
• Listing Date: October 22, 2024

Hyundai Motor IPO Subscription Status

The IPO of Hyundai Motor India Ltd was subscribed 0.18 times by 5 p.m on its first day of bidding. Non-institutional investors subscribed 0.13 times their allocation, while retail investors subscribed 0.26 times. Meanwhile, qualified institutional buyers subscribed just 0.05 times their reserved portion.

Overview of Hyundai Motor India Ltd

Hyundai Motor India Ltd is a part of the Hyundai Motor Group, the third-largest global automotive original equipment manufacturer (OEM) by passenger vehicle sales in CY23. In India, Hyundai has established itself as a major player, holding the second-largest market share after Maruti Suzuki. 

Hyundai’s product lineup features 13 models across various passenger vehicle categories, including sedans, hatchbacks, SUVs, and electric vehicles (EVs). SUVs, in particular, dominate the lineup, contributing 67.41% of total domestic sales volume in Q1FY25.

Hyundai Key Strengths

• Strong Market Position: Since FY2009, Hyundai has maintained its position as the second-largest auto OEM in India's passenger vehicle market by domestic sales volume. It is also the second-largest exporter of passenger vehicles from April 1, 2021, to June 30, 2024.
• Extensive Sales and Service Network: Hyundai has a well-established network across India, with 1,377 sales outlets in 1,036 cities and towns, and 1,561 service centers in 957 cities and towns as of June 30, 2024.
• Impressive Track Record: Hyundai has shown robust growth, with its operational revenue and net profit posting compounded annual growth rates (CAGR) of 21% and 45%, respectively, from FY22 to FY24. 
• Solid Return Metrics: Hyundai boasts impressive financial efficiency, achieving a Return on Net Worth (RoNW) of 56.82% and a Return on Capital Employed (RoCE) of 62.90% in FY24, surpassing industry peers. Higher dividend payouts in FY24 contributed to a significant increase in return ratios.
• SUV Segment Leadership: Hyundai continues to dominate the SUV segment in India, selling 389,000 SUVs in FY24. SUVs, representing premium products with higher margins, contributed 63% of Hyundai's domestic sales volume (versus 36% for Maruti).

Hyundai Risk Factors

• Declining Market Share: Hyundai's domestic passenger vehicle market share dropped from 17.6% in FY20 to 14.6% for the three months ending June 30, 2024. If this downward trend persists, it could negatively impact the firm’s business.
• Royalty Payments: Hyundai pays 3.5% of its sales as royalties to its Korean parent company. Any increase in this royalty fee, potentially up to or beyond 5% of the annual consolidated turnover, could harm its business and profitability.
• Capacity Constraints: Operating at high capacity utilization levels (94%), Hyundai may face challenges meeting additional product demand if there are delays in making the Talegaon Manufacturing Plant operational. 
• EV Strategy Dependence: Hyundai's long-term competitiveness hinges on its electric vehicle (EV) strategy. However, a significant portion of its current sales still comes from non-EV passenger vehicles, with internal combustion engine (ICE) vehicles accounting for 88.55% of total sales in Q1FY25. The success and cost-efficiency of its EV strategy are not guaranteed.

Hyundai Valuation & Recommendation

Hyundai is firmly positioned as a key player in the automotive sector, just behind Maruti Suzuki. The company has demonstrated robust financial growth, backed by solid return metrics. In terms of valuation, the IPO is priced with a P/E ratio of 26x, slightly above the industry average, offering limited short-term upside potential.

Although this is India's largest IPO, it is entirely an offer for sale, meaning none of the proceeds will be used for the company's growth or expansion. Historically, investors have seldom made money on such large IPOs. 

Hyundai’s dominance in the rapidly growing SUV segment, along with a broad product portfolio, positions the company well for future growth. However, the company has yet to establish a significant presence in the EV segment and its long-term competitiveness hinges on this. 

Considering these factors, investors may want to consider buying shares of Hyundai after listing, once the stock price stabilizes.

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