World’s hottest market could be magnet for foreign issuers

Shares of Hyundai Motor India, the Indian unit of the Korean carmaker, slipped 4% in the first day of trading Tuesday, after raising $3.3 billion in the country’s largest ever IPO. That might seem odd when newly listed stocks in the country often fly high right out of the gate, with some issues more than doubling on the first day.

But individual investors, who are a major driving force behind some of the country’s frenetic trading, weren’t too enthusiastic about the IPO—the retail portion of the deal wasn’t fully subscribed. Hyundai India’s massive size is probably the reason as that makes it much harder to flip a stock for quick gains: In the past, big Indian IPOs typically haven’t done as well in early trading as smaller ones. Support from institutional investors helped Hyundai to complete the record offering.

The Korean automaker decided to sell nearly 18% of the unit in the IPO, and it is easy to see why. India’s red-hot stock market means the Indian unit trades at a substantial premium to its Korean parent—at around 25 times historical earnings, compared with about 5 times for its parent. India made up around 6% of Hyundai’s revenue for the June quarter, but Hyundai’s remaining stake in the Indian unit is already equal to around a third of its own market value.

Part of the explanation is that investors were willing to pay higher multiples for Hyundai’s Indian business for its fast growth. Hyundai India’s revenue grew 49% in the past two fiscal years while improving margins helped net profit double during the period.

Since rolling into India in 1996, Hyundai has established itself as the second largest automaker in the country. It has around 15% of the market while its sister company, Kia Motors, has 6%. Market leader Maruti Suzuki, a subsidiary of Japanese carmaker Suzuki, has a 43% market share thanks to its more than four decade presence in the country. Hyundai focuses on a slightly more premium segment, doing particularly well in sport-utility vehicles.

India isn’t just a fast-growing market for Hyundai. The company is using the country as a production base for exports, especially to the Middle East. Hyundai India’s sales to the Middle East nearly tripled in the past two fiscal years. Strong economic growth and a young labor force have been a draw for multinational companies investing in India. Hyundai India’s IPO may provide a signpost for these companies that have been plowing money into the country in recent years.

But a fast-growing local market and a cheap local labor pool don’t fully explain the chunky multiple Hyundai was able to reap. India’s stock market has experienced a boom that puts even America’s recent experience to shame. Double-digit multiples are rare for auto manufacturers not named Tesla these days. While Hyundai’s IPO didn’t light the world on fire by recent Indian standards, just being listed in the country certainly seems to have provided a premium.

Some other companies may follow suit. Korea’s LG Electronics, for example, is considering whether to sell part of its subsidiary. Walmart, which owns Indian e-commerce giant Flipkart and payment platform PhonePe, may also take advantage of the high valuations on the Indian market.

India is a promising market for multinationals in the country for the long haul. Its red-hot equity market might not always be as buoyant.

Write to Jacky Wong at jacky.wong@wsj.com