A missed opportunity for direct investment?

Hyundai Motor India’s (HMIL) $3 billion Initial Public Offering (IPO), which is currently on, is a pure Offer for Sale (OFS) rather than an issue of fresh shares. The IPO itself has raised several concerns, including the pricing of the share, the huge royalty payout, and whether the amount raised will be pumped into the Indian operations.

Firstly, the proceeds from the offer on sale will go to Hyundai Motor Company (HMC), the South Korean parent, rather than HMIL. For potential investors, this could be a missed opportunity for HMIL to benefit from the capital raised directly. While HMC may use the funds for global operations and research and development (R&D) investments, HMIL may see a small portion of capital for local operations, leaving some investors questioning how the company will finance its growth and expansion plans in India.

This IPO, considered the largest ever in India’s automotive industry, involves the sale of up to 142.19 million equity shares at a face value of ₹10 each. The offering is priced between ₹1,865 and ₹1,960 per share, aiming to raise between ₹26,505 crores and ₹27,856 crores. It will offload a 17.5 per cent stake in HMIL. It marks HMC’s first public listing outside of South Korea.

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Hyundai’s market position

HMIL is India’s second-largest passenger vehicle manufacturer, a position it has maintained since 2009. Hyundai has been a key player in the automotive market with its diverse portfolio of vehicles, including popular models such as the Creta, Venue, and the electric Ioniq 5. The company is also India’s second-largest exporter of passenger vehicles.

Despite its success, HMIL faces rising competition from domestic manufacturers like Tata Motors and Maruti Suzuki. The Indian automotive market is becoming increasingly competitive, particularly in the rapidly growing SUV and electric vehicle (EV) segments.

While HMIL has already invested in EV models and plans to launch India-made EVs next year, it remains to be seen how the company will fund future growth without the fresh capital that could have been raised from this IPO. Even its tag of being India’s second-largest automaker is under threat as Mahindra & Mahindra is a few hundred away in terms of volume.

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Risks in OFS structure

The lack of fresh capital from the IPO raises concerns about HMIL’s ability to expand its market share and finance its ambitious plans for India. The proceeds from the IPO will go directly to HMC, which may use the funds to invest in R&D or other global projects. However, HMIL may face challenges funding its local expansion without new funds, particularly as the automotive industry shifts toward electric mobility.

HMIL has consistently demonstrated strong financial performance. For FY2024, the company reported revenues of ₹69,829 crores, a 15.79 per cent increase from the previous fiscal year. Its EBITDA margin stood at 13.49 per cent, with a net profit margin of 8.50 per cent, reflecting its operational efficiency. These figures are impressive compared to competitors like Tata Motors and Maruti Suzuki. Moreover, HMIL’s Return on Capital Employed (ROCE) was an exceptional 62.90 per cent, far exceeding industry averages.

However, the concern remains: without an influx of capital from the IPO, how will HMIL continue to finance its expansion into the EV market, improve its manufacturing capabilities, and remain competitive in the face of growing domestic competition? The company has committed to several strategic initiatives, including introducing new EV models, expanding production capacity, and enhancing R&D capabilities, all of which require significant investment. The IPO’s structure leaves HMIL reliant on existing cash flows or external financing to achieve these goals.

Investors should also be mindful of the risks associated with this IPO. As a first-time public issue, there is no established market for Hyundai Motor India’s shares, which introduces uncertainty about post-listing price stability. While the offer price will be set based on market demand, there is no guarantee that the stock price will perform well after listing. The prospectus highlights the potential for equity-related risks, noting that market volatility could affect the company’s performance, especially considering the cyclical nature of the automotive industry.

In addition, global supply chain disruptions and rising raw material costs are significant challenges facing the automotive sector. For Hyundai, these issues could impact profit margins, particularly as it attempts to scale up the production of electric vehicles and meet the growing demand for fuel-efficient and sustainable transportation solutions.

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A fierce battle for market share

HMIL operates in an increasingly competitive landscape. Domestic players like Tata Motors and Mahindra & Mahindra have made significant inroads into the SUV and electric vehicle markets, with Tata leading in the EV segment. Moreover, Hyundai faces competition from new entrants like Kia, which has gained a significant market share relatively quickly.

Hyundai’s future growth will depend on its ability to rapidly scale its EV production, innovate, and maintain its competitive advantage in the face of rising competition. However, the lack of fresh capital from the IPO means the company could find it challenging to keep pace with its rivals regarding R&D, production capabilities, and market penetration.

Strategic questions for investors

For potential investors, the biggest question is whether this IPO represents an excellent opportunity to invest in Hyundai’s growth story in India. While HMIL’s current market position is strong, the lack of fresh capital from the IPO raises concerns about how the company will fund future initiatives. Investors may need to consider whether the parent company’s divestment signals a reduced focus on the Indian market or a strategic move to capitalise on the country’s growth without reinvesting in the local subsidiary.

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Furthermore, the IPO’s valuation — with a price band of ₹1,865 to ₹1,960 per share — places Hyundai at a premium compared to other players in the Indian automotive market. At these levels, investors must evaluate whether the stock is overvalued when listing, especially given the risks associated with the broader industry dynamics and Hyundai’s future growth prospects.

Given the high valuation and competitive dynamics, Hyundai must demonstrate agility and innovation to remain a market leader. For investors, this IPO represents a cautious opportunity that requires a thorough evaluation of Hyundai’s current market position and its ability to sustain growth without fresh capital.

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