Hyundai IPO: From higher royalty to pre-IPO dividend, Deepak Shenoy highlights ’real’ concerns

Hyundai Motor India IPO: The much-anticipated Hyundai Motor India IPO is open for subscription and has been receiving slow response from investors. The public issue has garnered mixed reactions from investors and has sparked widespread discussions about the valuations and the issue being fully an offer for sale (OFS) by the South Korean parent, Hyundai Motor Company.

Deepak Shenoy, Founder of Capitalmind, weighed in on X (formerly Twitter), and highlighted two key points often debated by potential investors on Hyundai Motor India IPO. While Shenoy did not recommend or oppose the IPO, he shed light on nuanced aspects that investors should take into account before making any decisions.

Offer for Sale: A Common Structure

Hyundai IPO is a complete Offer for Sale (OFS), and the proceeds of the sale will go to the selling shareholders, rather than to the company. This structure allows existing shareholders to exit, a practice some criticize.

However, Shenoy argues that it is not necessarily a negative aspect, as companies that do not need external funding to grow are likely cash-generative. Such companies are usually steady-state companies that have a solid base, and hence, may command a higher market capitalization.

He highlights that in secondary market transactions, companies do not make any additional revenue from the sale of shares, as they are simply transferred between shareholders.

Therefore, Shenoy dismisses the criticism of the Hyundai IPO being an OFS as insignificant, noting that what matters more is whether the exiting shareholders are strategically leaving the company, which does not appear to be the case with Hyundai Motor India IPO, as they remain significant shareholders post-IPO.

“The bigger question should be: are they selling and running away? That was the case in many startups where the VCs just want to exit, sometimes at any price they can get. That sucks. And they'll keep selling after the IPO also. But it's not quite true in the Hyundai case, cos they remain large shareholders and continue to run the co. Just saying it's not a valid criticism in my book. This is not an endorsement of the IPO itself,” Shenoy wrote in a post on X.

Dividends and ROE Considerations

Another point Shenoy touches upon is the concern over Hyundai taking out a large dividend payout, a practice that sometimes raises eyebrows. However, he justifies this move, explaining that the cash was generated by the company and, in Hyundai’s case, is not necessary for the business’s growth.

“That cash is not required to grow the business, more than 10,000 cr. This drags down ROE also, because your equity is unnecessarily high. It's better to reduce the cash, and as you generate more profit, you will have a higher ROE and anyhow you don't need cash or debt to run ops,” Shenoy said.

Shenoy contrasts this with examples like Indigo, where dividends were taken out pre-IPO despite the company’s need for cash, but he maintains that such practices are fair as long as they are disclosed.

Real Risks to Watch: Royalties and Competition

Beyond the OFS and dividend issues, Shenoy directs attention to more substantive risks that investors should consider. Among these are Hyundai’s rising royalty payments to its Korean parent and the challenges the company faces in a competitive Indian automotive market, especially with the growing prominence of electric vehicles (EV).

Additionally, the presence of Kia, owned by Hyundai's global parent but distinct from Hyundai India, could introduce new competition and innovation in the Indian market.

Shenoy finally states that while some concerns raised by others may seem petty, investors should focus on the more meaningful risks involved with Hyundai’s business. He clarifies that he is not applying for the IPO and holds no position in Hyundai Motor India, signaling neutrality in his analysis.

Catch Hyundai IPO Day 2 LIVE Updates here

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before making any investment decisions.