Hyundai may beat Korea discount with IPO in India

Hyundai Motor’s IPO, the largest in India after Life Insurance Corporation of India’s  ₹20,000 crore-plus share sale in 2022, will be the country’s first automobile IPO in two decades.
Hyundai Motor’s IPO, the largest in India after Life Insurance Corporation of India’s 20,000 crore-plus share sale in 2022, will be the country’s first automobile IPO in two decades.

Summary

  • Hyundai Motor India's IPO puts the spotlight on India's automotive sector that has already emerged as the third-largest car market in the world.
  • Competition in the SUV and EV space is rising as listed OEMs outline aggressive market expansion plans.

South Korea’s Hyundai, which began its Indian odyssey with the Santro small car 25 years ago, has taken the wraps off the country’s second-biggest public share sale, hoping to beat the so-called Korean discount in India's vibrant stock market.

Hyundai Motor Co. will sell up to 17.5% of Hyundai Motor India Ltd (HMIL), the automaker’s draft IPO papers filed on Saturday showed. While the company didn’t indicate the amount it plans to raise, a merchant banker said, on the condition of anonymity, the parent plans to raise $2.5-3 billion at a valuation of close to $20 billion.

Korean conglomerates typically see lower valuations than global peers due to low dividends and the dominance of opaque chaebols. Hyundai Motor Co., for instance, trades at a paltry price-to-earnings ratio of five, compared with Maruti Suzuki India Ltd (32), Mahindra & Mahindra Ltd (about 20) and Tata Motors Ltd (about 17).

“With the Hyundai IPO, the top four major passenger vehicle makers in India—Maruti Suzuki, Hyundai Motor India, Tata Motors and Mahindra & Mahindra—will all be listed. It would also increase investor interest in the sector. Hyundai has one of the strongest powertrain portfolios globally, be it electric vehicles (EVs), internal combustion engine (ICE), plug-in hybrids and hybrids, as well as a strong presence in the SUV portfolio in India," Jay Kale, an analyst at broking firm Elara Capital said.

The Korea discount 

South Korea is currently running a ‘corporate value-up programme’, a reform plan for listed companies to boost shareholder returns and reduce the Korea discount. Under the programme, the South Korean government encourages companies’ voluntary efforts to return more capital to shareholders and improve governance.

Also Read: Hyundai starts setting the stage for India’s biggest IPO

“On the basis of reported valuations of 1.5 trillion, the asking P-E is 25.6," said Aditya Kondawar, partner, Complete Circle Capital, a wealth management firm. “The IPO will be critical for both investors and the company, since India is Hyundai’s third-largest revenue generator after the US and South Korea," Kondawar added.

Hyundai Motor’s IPO, the largest in India after Life Insurance Corporation of India’s 20,000 crore-plus share sale in 2022, will be the country’s first automobile IPO in two decades. It is expected to improve investor perception of the parent and the visibility of Hyundai's Indian operations, allowing it to return greater cash to shareholders. HMC is the sole seller, offloading over 142 million equity shares of face value of 10. All the proceeds will go to the Korean parent. The offer document says Hyundai is looking to list to ‘enhance visibility and brand image’ and ‘provide liquidity and a public market for equity shares in India’.

“Listing its India subsidiary indicates a significant potential for value realization from the world’s third-largest passenger vehicle market, which has not yet been fully reflected in Hyundai’s overall market valuation," an industry executive said. “The India listing is projected to allow a re-evaluation of the (company’s) remaining operations and India’s weight in the business, potentially increasing Hyundai’s overall market capitalization," the executive said on the condition of anonymity.

The carmaker aims to list on Indian exchanges ahead of the festive season.

Stock price movement 

In a March report, South Korean broking firm Meritz Securities said Hyundai’s corporate value enhancement plan will greatly determine the direction of its stock price movement in the first half of the year. “Hyundai Motor is expected to present a new plan to improve shareholder value in early June, utilizing increased cash flow for potential share buybacks or cancellations, which would further boost (return on equity). This increase in RoE would lead to a higher fair price-to-book ratio, strengthening the case for enhanced corporate value," the report said.

 

According to the draft prospectus, HMIL’s revenue from operations grew from 40,972.25 crore in 2020-21 to 60,307.58 crore in 2022-23, up nearly 47% over two years on the back of robust demand and market penetration. At the same time, profit more than doubled from 1,881.16 crore to 4,709.25 crore, as the carmaker began selling more premium SUVs, besides achieving better operational efficiency and cost management. Its net worth increased from 15,311.34 crore in 2020-21 to 20,054.82 crore in 2022-23, with return on net worth improving from 12.29% in 2020-21 to 23.48% in 2022-23, the prospectus said.

 

In India’s car market, Maruti Suzuki India, the country’s largest carmaker at over 40% market share, led in revenue with 1,06,451 crore and profit at 8,049 crore in 2022-23, also demonstrating the highest earnings per share of 266.28. Tata Motors, while having a revenue of 88,484 crore, reports lower profitability with a profit of 2,514 crore and a higher debt burden at 22,728 crore in 2022-23. HMIL and Maruti Suzuki have similar dividend payouts, significantly higher than Tata Motors, indicating strong cash flows and shareholder returns.

Interestingly, the IPO also comes at a time Hyundai’s closest competitor Tata Motors, whose emphasis on EVs and a strong push in the SUV segment have significantly contributed to closing the market share gap with Hyundai, is gunning for a 20% market share by 2030.

Also Read: Will Tata’s Curvv ball strike out Hyundai?

The company in its prospectus said it will focus on increasing its EV market share, maintaining capacity utilization at over 90% balancing domestic sales and exports, as well as deepening its localization and local supplier network in India.

“We are following a transition strategy, having started with the launch of high-end, premium EVs and plan to transition towards the mass markets as the EV market and ecosystem scales up in India. In line with the same, we aim to launch four EV models in future including Creta EV in the last quarter of 2024-25," it said.

Hyundai's Chennai manufacturing plant, located at Irrungattukottai, Sriperumbudur, Tamil Nadu, was HMC’s first global integrated manufacturing plant outside Korea, with a production capacity of 824,000 units as of 31 March 2024​. Its newly-acquired Talegaon factory near Pune will add a further up to 250,000 in capacity, with the first phase of the plant expected to be operational in the second half of 2025-26.

Returns to shareholders

Hyundai’s IPO in one of the world’s fastest-growing automotive markets will allow the company to enhance its market value in response to the South Korean government encouraging companies to pursue foreign listings to boost their valuations and return more cash to shareholders.

Also Read: Mint Explainer: The EV incentive conundrum

While Hyundai is flush with cash at the parent level, the India IPO is also intended to generate additional capital that the company can use partially towards enhancing shareholder returns through dividend payouts and share buybacks.

Hyundai’s India listing not only affirms its decision to double down on its operations in the country—which includes establishing a battery assembly factory and increasing production capacity via its buyout of General Motor’s factory in Talegaon, Pune—but also sets a precedent for other Korean companies seeking to expand their investor base and improve valuations through international listings.

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