Hyundai India struggles to steer past margin woes

A key disappointment was the 70-basis-point (bps) sequential drop in operating margin, which fell to 12.8% in the September quarter (Q2FY25). Lower domestic and export volumes, coupled with higher discounts, weighed on profitability. The decline was exacerbated by a high base effect, as Hyundai’s Ebitda margin had peaked at 13.5% in Q1FY25—the highest in four years.

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In an effort to stimulate demand, Hyundai raised retail discounts by 40bps to 1.9% in Q2FY25. However, this failed to boost sales volumes, which remained flat quarter-on-quarter, dragging margins lower. As a result, net profit fell nearly 8% sequentially to ₹1,376 crore in Q2FY25.

Profitability pressures to persist

A concern is that Hyundai’s profitability might remain under strain in Q3FY25 as well. Deep discounts and subdued wholesale volumes could further squeeze Ebitda margin. While the management expects steady demand driven by higher SUV (sports utility vehicle) sales and the wedding season in November, weak industry-wide sales so far this month and continued reliance on discounts may pose significant challenges for Indian carmakers in the near to medium term.

Auto companies typically increase their discounts on retail sales in Q3 to attract more customers during the festival season, while their wholesale volumes usually dip in December as dealerships tend to shun fresh stocks towards the end of the year. But having said that, the tepid IPO performance of Hyundai India, which is the second-largest carmaker in the country, and the decline in its profits and profitability are emblematic of the ongoing demand struggles of the broader industry.

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Hyundai India’s management anticipates low single-digit growth in the domestic passenger vehicle industry in FY25, citing a high base for previous year and ongoing near-term macroeconomic challenges. It aims to tackle headwinds in domestic and export markets by maintaining its premiumization strategy along with cost optimization.

Amid muted sales in the entry-level segment for carmakers like Maruti Suzuki Ltd and Tata Motors Ltd, a focus on premiumization has been a silver lining for some, particularly SUV-centric Mahindra and Mahindra Ltd (M&M). In H1FY25, M&M’s passenger vehicle market share climbed to an all-time high of 12.5% on the back of strong Thar sales, while market shares of the top two players, Maruti and Hyundai India, dropped to their lowest levels in 12 years, according to a Jefferies India report dated 12 November.

Since SUVs account for the majority of all the OEMs’ domestic sales, this category has become even more competitive in the last three years. Companies with a stronger premium SUV portfolio are expected to grow the fastest going forward. Continued weakness in small cars (for Maruti), increased competitive launches in SUV and no new major product launch could lead to near-term market share loss for Maruti and Hyundai India, Jinesh Gandhi, lead automobiles analyst at Ambit Capital told Mint.

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While Hyundai has lined up four new electric vehicle (EV) launches, beginning with the Creta EV scheduled for Q4 launch, it did not provide details on its upcoming internal combustion engine models.

“Hyundai Motors India has established a strong franchise in India; but lack of major launches (key growth driver historically in PVs) over the next 9-12 months, muted ~5% capacity CAGR, higher royalty, and lower treasury income are likely to restrict EPS CAGR to 4% over FY24-27E," said Emkay Global Financial Services in a report on 13 November.

From its listing price of ₹1,934 on 22 October, the Hyundai stock is up just 0.3% so far.