IPO Size: Rs. 27,870 cr (India’s biggest IPO till date)   

• Entirely Offer For Sale (OFS) by South Korean promoter Hyundai Motor Company (100% stake to drop to 82.5%)

Price band: Rs. 1,865-1,960 per share

M cap: Rs. 1,59,258 cr, implying 17.5% dilution

IPO Date: Tue 15^th Oct to Thu 17^th Oct 2024, Listing Tue 22^nd Oct 2024

Grey Market Premium (GMP): We are strongly against ‘grey market premium’ as it is an unofficial figure, against SEBI guidelines.

India’s #2 Passenger Vehicle OEM

Hyundai Motor India, wholly owned subsidiary of world’s 3rd largest Auto OEM (original equipment manufacturer) South Korea’s Hyundai Motor Company, is India’s 2^nd largest car manufacturer, enjoying 14.6% domestic market share in Q1FY25, trailing Maruti’s 41.1% and leading Tata Motors’ 13.5% and M&M’s 12.2%.

Powertrain mix is 88% internal combustion engines, 11% CNG and <1% electric.

Increasing Competition

On sale of 51,101 vehicles in Sep 2024, Hyundai ranked #2, with a lead of only 39 cars from #3 M&M’s 51,062 vehicles. Exports for Sep were also lower, dropping monthly sales 6% YoY. However, company is confident of stronger performance in upcoming festive season and new launches.

20% Capacity Expansion in 15 months

In past 26 years, Hyundai has invested Rs. 30,100 cr in India and commits further ~Rs. 32,000 cr, including towards electrification (EV plant in Tamil Nadu). Its manufacturing facility at Chennai has 8.24 lakh units per annum capacity, utilized 97% with 90% localization. It acquired manufacturing plant in Talegaon from General Motors for Rs. 787 cr, on which Rs. 6,000 cr investment is underway. This plant is likely to commence operations by H2FY26E, increasing production capacity by 20% to 9.94 lakh units pa, and ultimately to 10.74 lakh units pa, entailing 30% hike from the present level.

Growing Financials

FY24 revenue grew 16% YoY to Rs. 69,829 cr, as sales volume rose 8% YoY to 6.15 lakh vehicles and realisation improved 7% YoY to Rs. 9 lakh per vehicle. Operating profit (EBITDA excluding other income) rose 21% YoY to Rs.9,133 cr, translating into 13% operating margin, and 8.7% net margin.

Q1FY25 revenue rose 4% YoY to Rs. 17,344 cr on 5% volume growth, with operating profit up 17% YoY to 2,340 cr. On Q1 PAT of Rs. 1,490 cr, net margin strengthened to 8.6%, with an EPS of Rs. 18, against Rs. 75 for FY24.

SUVs and Exports Expand Margin

Share of sports utility vehicles (SUVs) rose from 52% of revenue in FY22 to 63% in FY24 (51% industry-average in FY24), with Creta commanding 30% SUV market share in India. Rising mix of SUVs has helped Hyundai strengthen margin, from 11.6% operating margin in FY22 to 13.5% in Q1FY25.

In addition to product mix, exports, fetching 8% higher realisation than domestic, grew at 25% CAGR between FY22 to FY24, supporting faster profitable growth. Exports are mainly to Middle East, Latin America and Africa, and account for 22% of volume and 23% of revenue.

Comparison vis-à-vis Maruti

• Hyundai is debt-free, with surplus cash of Rs. 7,750 cr, yielding annual treasury income of about Rs. 1,400 cr. This contributes to nearly 18% of profit before tax (PBT). Maruti also has a large treasury contribution, of 23% of PBT, on Rs. 56,000 cr cash.
• Hyundai’s royalty of 2.2% to foreign parent is lower than Maruti’s 3.5%. However, going forward, it is likely to increase to 3.5%.
• Just before the IPO, Hyundai doubled dividend payment YoY to Rs. 10,800 cr, as against annual PAT of Rs. 6,060 cr. FY23 dividend payout was also high at 99%. High dividend payouts translate to lower net worth (Rs. 10,700 cr) and higher RoE of 57% for Hyundai, against 17% RoE for Maruti on net worth of Rs. 85,600 cr.

Tata Motors and M&M are not as good peers as Maruti, due to dominant presence in commercial vehicles and tractor segments respectively.

‘Higher Than Expected’ Pricing

On FY24 EPS of Rs. 75, Hyundai IPO is priced at historic PE of 26x and EV/revenue of 2.2x. Maruti’s revenue of Rs. 1.4 lakh cr is exactly double of Hyundai’s with former’s net margin higher at 9.5%. On m cap of Rs. 3.9 lakh cr, Maruti is trading at FY24 PE of 29x and EV/revenue of 2.4x. Thus, Hyundai’s IPO pricing is only 10% lower than larger, more profitable Maruti. This coupled with IPO being a 100% OFS, leaves little on the table for the short-term.

However, company’s SUV leadership, ongoing capex and EV entry make long term prospects bright. Hyundai offers growth at scale + high margins – a combination not easy to come by. With a mega cap tag, stock will surely attract institutional and passive inflows, besides being a potential Nifty/Sensex entrant eventually. Post listing, non-promoter non-institutional float will be 8.75%, keeping demand high from long term investors.

Higher Multiples on Indian Shores

Hyundai Motor India’s PE multiple is ~26x, against parent Hyundai Motor Corp’s 5x on South Korean exchange. Thus, the Indian business, accounting for 8% of Korean’s parent total revenue and net profit, will contribute to ~40% of the latter’s m cap of Rs. 4 lakh cr. This is observed across other MNCs too like Maruti, ABB, Siemens, Cummins, Hindustan Unilever among others, due to higher growth opportunity and risk appetite domestically.