Hyundai Motor India IPO sees slow pick up as analysts raise high valuation concern

Hyundai Motor India IPO: Today (Tuesday, October 15), Hyundai Motor India Ltd launched its initial public offering on D-Street, and the first day of bidding has been marked by a gradual and consistent pace. The IPO has garnered a subscription of 18% on the opening day. Among the subscriptions, the retail investors' portion stands at 26%, the non-institutional investors' quota at 13%, and the qualified institutional buyers (QIBs) section at 5%. Additionally, the employee portion has seen a subscription of 79%.

Market analysts have pointed out that historically, larger Offer for Sale (OFS) have not been rewarding for investors, citing the example of the Life Insurance Corporation of India (LIC) IPO.

Being largest IPO in India's history has generated significant buzz and curiosity around Hyundai Motor India and its stock offering but however, market experts have raised huge concerns over its valuations.

Hyundai Motor India, established in 1996, is a prominent automobile manufacturer in India and a wholly-owned subsidiary of Hyundai Motor Company, Korea. It is well-known for its popular models like the i20, Creta, and Venue. The Indian unit will not issue any new shares, but its Korean parent, Hyundai Motor, plans to sell up to 142.2 million shares of the unit, representing a 17.5% stake. The entire proceeds from the IPO will go to the parent company, which has not provided details on how they will be utilised.

This carmaker's share sale reinforces India's position as one of the busiest markets for equity capital-raising this year, with more than 100 companies being listed in the September quarter, as per reports. However, the fluctuating demand from individual investors for its shares also highlights the challenges the company will encounter in a competitive market filled with incentives and price reductions as the pandemic-induced demand surge diminishes.

Here what experts have to say

Mohit Gulati, the CIO and managing partner of ITI Growth Opportunities Fund

Gulati explained that the upper end of the price band for Hyundai Motor India is set at ₹1,960. This translates to a valuation of 26 times EPS on an FY24 basis and about 30 times EPS on an FY25 basis due to a challenging year.

Despite people's love for the brand, it's important to recognise that the company is conducting a complete Offer for Sale paying its parent; capturing the peak of a liquidity-driven Bull Market, which may not be favourable for investors. Additionally, Hyundai's market share has remained stagnant or even decreased, with Maruti Suzuki on the higher end and Tata Motors (TaMo)+Mahindra & Mahindra competing from below. Considering these factors, I believe the issue price should be at least 100-250 rupees lower. Therefore, I will be avoiding this issue.

“However, I would consider buying the stock once the industry's macros/micors start improving, better products start rolling out from Hyundai (and not Kia!), and the valuation hits the 21-23x one year forward mark. Until then enjoy the Laugh of Liquidity!,” said Gulati.

Prashanth Tapse, Research Analyst, Senior Vice President of Research at Mehta Equities

Prashanth Tapse highlighted that based on the projected annualised FY25e earnings, the IPO seems to be fully priced, leaving little room for significant listing gains.

Hyundai Korea is planning to sell shares worth ₹27,870 Cr through an offer for sale (OFS) in the Indian market, valuing the company at around ₹1.59 Lac crore at the higher price band. Despite contributing only about 6.5% of Hyundai's global revenues and 8% of its profitability, Hyundai India is seeking a premium valuation compared to its parent company, which trades at a 5-6-time Price to Earnings ratio and is valued at approximately 42% of the South Korean parent's market capitalisation at the time of listing. When compared with domestic peers Hyundai Motor India is seeking slightly higher premium to Maruti and lower to M&M based on price earnings ratio while Hyundai stands to be expensive in terms of price to book value.

“Taking into account all the factors, the significant question worth a billion dollars is whether Hyundai exceeds valuations compared to Maruti Suzuki, Tata Motor, and Mahindra & Mahindra. Investors should also consider IPO offerings that include 100% Offer for Sale (OFS) amounting to ₹27,870 Cr, which is a cause for concern for new investors. Given the peak valuations coupled with 100% OFS, there is a high likelihood of a +or-5% flat listing and a low likelihood of any substantial listing gains,” advised Tapse.

Arun Kejriwal, the founder of Kejriwal Research and Investment Services

Kejriwal stated that the merchant bankers and company promoters were pleased to see the grey market premium quoted at around ₹700-725. Therefore, they decided to increase the issue price for the offer for sale issue. This led to an increase in the issue size by approximately ₹3,000 crores and a decrease in the premium to around ₹100.

In what is being called the largest issue ever, investors are anticipating listing gains. If the company expects to keep all the earnings to themselves, they are mistaken. Given the current pricing, limited capacity, high pricing, and a significant decline in grey market premium, the issue appears to be costly for the listing day and short-term prospects. It is advisable for readers to consider long-term investment and make a decision even after the listing.

Longer term capex of 2.5 lakh cars in 15 months and four new EV's in 4 to 5 months would make the offering exciting, believes Kejriwal.

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