Hyundai India's US$ 3 Billion IPO: A Threat to Maruti Suzuki?

The Indian stock market is abuzz with anticipation for a potential game-changer in the auto space: The Hyundai Motor India (HMIL) Initial Public Offering (IPO).

This offering has the potential to be a landmark event, not only for Hyundai but for the entire Indian automotive landscape.

The market is predicting a blockbuster debut for HMIL, with estimates suggesting the IPO could raise a staggering US$ 2.5 to US$ 3 billion (bn).

This figure, if realised, would propel the HMIL IPO to the top of the charts, potentially eclipsing the current record held by the Life Insurance Corporation of India (LIC), which raised US$ 2.7 bn in May 2022.

To ensure a smooth and successful listing, Hyundai has finalised its advisor team, adding Kotak Mahindra Capital and Morgan Stanley to the existing group that includes Citi, JP Morgan, and HSBC Securities.

Let's delve deeper into the details surrounding this highly anticipated IPO.

Hyundai India: A Closer Look

Hyundai Motor India is a subsidiary of the South Korean automotive giant Hyundai Motor Company.

Established in 1996, HMIL has become a prominent player in the Indian car market.

The company is the leading exporter of passenger cars from India, shipping vehicles to over 88 countries across Africa, the Middle East, Latin America, Australia, and Asia Pacific.

Catering to a wide range of segments, HMIL offers a strong lineup of 13 car models.

It boasts a robust network across India with over 1,366 sales points and 1,548 service points, ensuring easy access for customers.

India is a significant market that accounted for around 13% of Hyundai's global sales in 2023. i20, Verna, Creta, Aura, and Tucson are some of the firm's car models in the Indian market.

The India unit clocked the highest-ever domestic sales in 2023, crossing the six-lakh mark. It sold 602,111 units, a 9% increase over the previous year's 552,511 units.

On the export front, the performance rose by 10%, as it shipped 163,675 units compared to 148,300 units on a year-on-year basis.

The draft red herring prospectus (DRHP) filing with SEBI (Securities and Exchange Board of India) is expected by June/July 2024, with a potential launch by October-November 2024.

Valuation Insights

The targeted ballpark valuation for the Indian arm is around US$ 20 bn, though there are many variables at play and these are early stages.

The final valuation and IPO size will depend on the company's strategy and market conditions. Previous media reports have estimated the local unit's valuation between US$ 22 bn and US$ 30 bn.

A US$ 30 bn valuation represents more than half of its parent company's market capitalisation of around US$ 47 bn in Seoul. At US$ 28 bn, HMIL would be valued at 48 times its FY23 earnings, while at US$ 22 bn, it would be 38.4 times.

For comparison, Maruti Suzuki trades at 40 times FY23 earnings. HMIL may command higher multiples as its FY23 EBIT per vehicle was about double that of Maruti Suzuki.

A valuation of US$ 30 bn would also make Hyundai a bigger competition to Tata Motors and Maruti Suzuki, both with a valuation of over US$ 40 bn.

Amid reports of the Hyundai IPO, there is significant curiosity among investors about the implications for Maruti Suzuki India (MSIL).

Maruti Suzuki vs Hyundai - How the Numbers Stack up

Hyundai India sold 602,000 vehicles in 2023, its highest-ever annual domestic sales in India, registering a growth of 9% over the previous year. The company's exports rose by 10% to 163,000 units compared to 148,000 units a year ago.

Meanwhile, India's largest passenger car manufacturer Maruti Suzuki reported around 0.4% YoY market-share gains in the ten months ending January 2024 led by healthy response to its SUV launches particularly the new Brezza, Grand Vitara, and Fronx.

Hyundai Motors India is the second largest passenger vehicle (PV) OEM with a 14.9% market share.

Maruti is losing market share in the Rs 4-7 lakh base model price segment, which includes hatchbacks and micro-SUVs.

Hyundai India's high-margin SUVs, such as Creta and Venue, have helped the South Korean carmaker close in on the market leader in revenue and profitability over the last few years.

Year	FY21	FY22	FY23
Maruti Suzuki Cars Sold (Units)	1,457,861	1,652,901	1,966,133
Hyundai India cars Sold (Units)	575,877	610,760	720,565
Maruti Suzuki Revenue (Rs m)	703,325	882,956	1,175,229
Hyundai India Revenue (Rs m)	406,740	470,428	597,615
Maruti Suzuki ASP in Rs/Unit	482,436	534,186	597,736
Hyundai India ASP in Rs/Unit	706,297	770,234	829,369

Data Source: Media reports

Despite Hyundai's impressive performance, Maruti Suzuki still maintains significantly higher sales volumes and revenue.

In FY23, Maruti sold nearly 1.97 million (m) units compared to Hyundai's 720,565 units. Maruti's revenue was Rs 1,175,229 m, while Hyundai's was Rs 597,615 m.

However, Hyundai India has a significantly higher average selling price (ASP) than Maruti Suzuki. In FY23, Hyundai's ASP was Rs 829,369 per unit, while Maruti's was Rs 597,736 per unit.

This higher ASP suggests that Hyundai sells more premium models compared to Maruti, indicating strong brand perception and customer loyalty towards Hyundai's offerings, especially in the premium segment.

While Maruti Suzuki remains the leader in terms of sales volume, Hyundai India's strategic focus on higher-end models and its ability to generate substantial revenue with fewer units sold, makes it a significant competitor.

Hyundai's higher ASP, steady growth, and superior profitability metrics position it well to challenge Maruti Suzuki's market leadership, particularly in the premium car segment.

An Increase in Competition for Other EV Makers

Hyundai, India's second-largest carmaker by sales, has been strategically reinforcing its presence in India and the United States, redirecting focus after scaling back production in China and exiting the Russian market.

Entering India over two decades ago, Hyundai is the only foreign player to have secured a significant market share alongside Maruti Suzuki.

Elon Musk's Tesla has been mulling entering the Indian auto market for a couple of years now, with talks of opening its first EV plant in Gujarat. However, Hyundai's IPO can further threaten the expansion of Tesla in India.

Hyundai's India unit IPO talks come amid Tesla's plan to enter India and if Hyundai's unit manages to go public in the country, it might help Hyundai better compete with Tesla in the Indian EV market in the future.

Hyundai has said it plans to invest close to US$ 4 bn in the Indian market in parts over the next decade to launch new EVs, charging stations and a battery pack assembly unit.

Hyundai has emerged as a trusted brand in India over the past two decades, while other foreign automakers like Ford Motor and General Motors have folded their India business. Tesla could likely face the same fate if the Hyundai IPO performs as per initial expectations.

Robust Financial Performance

The company has demonstrated revenue growth of 21.3% on a compounded annual growth rate (CAGR) basis over the period spanning from the financial years 2021 to 2023.

This performance can be credited to the growing customer base and a continuous growing demand.

While there was a good increase in revenue, the net profit of the company also increased from Rs 18.8 bn in March 2021 to Rs 47.1 bn in March 2023, at a CAGR of 58.3%.

Its net profit margin has also seen a significant growth.

Hyundai India's Financial Snapshot (2021-23)

Particulars	31-Mar-21	31-Mar-22	31-Mar-23
Revenues (Rs in bn)	409.7	473.8	603.1
Revenue Growth (%)	-	15.6	27.2
Net Profit (Rs in bn)	18.8	29.1	47.1
Net Profit Margin (%)	4.6	6.1	7.8

Data Source: Company's Draft Red Herring Prospectus (DRHP)

Looking ahead, the company has plans to extend distribution network to achieve deeper penetration in key states.

What's Next for Hyundai in India?

India is set to become Hyundai's largest market shortly, according to HMIL Managing Director and CEO Unsoo Kim. He stated in November that the company expects nearly 20% of its global sales to come from India within the next two to three years.

At this year's World Economic Forum in Davos, Hyundai Motor India Limited (HMIL) signed a memorandum of understanding with the Maharashtra government for a Rs 70 bn investment to modernise the old General Motors Talegaon plant near Pune, which it acquired last year.

The Talegaon facility will be Hyundai's second location in India, complementing its two existing plants in Tamil Nadu.

This investment is in addition to the Rs 20,000 crore announced in August, primarily focused on electrification, following a visit from Hyundai Motor Group Chairman Euisun Chung.

Hyundai plans to launch its first locally produced electric vehicle (EV) in India in 2025 and aims to produce five EV models by 2030.

Moreover, Hyundai Motor India will leverage its extensive sales network to expand the number of EV charging stations to 485 by 2030.

Equitymaster's Take on Hyundai India IPO

We reached out to Tanushree Banerjee, Co-Head of Research at Equitymaster on what she has to say about Hyundai India IPO.

Here's what she said...

• "The government's new EV incentive policy aims to sweeten the deal for global automakers like Tesla and Hyundai in India. This would ensure sufficient technology transfer and create a robust supply-side ecosystem for EVs.

  However, the key concern is that the new EV policy may lead to large-scale entry of Chinese auto firms like BYD in the local market. The Chinese market has robust raw material processing capabilities and a strong density of local EV manufacturers, leading to a secure supply chain and significant product rollouts.

  On the other hand, India is heavily reliant on foreign markets to procure raw materials for batteries, which leads to a high total cost of ownership (TCO) for EVs, resulting in a relatively lower adoption than global peers.

  Therefore, the new EV policy clearly puts stocks of domestic EV makers like Tata Motors and Maruti at risk if their execution and product launches are disappointing."

Conclusion

The electric vehicle (EV) sector in India is experiencing significant momentum, with the FAME II scheme continuing its second phase while anticipation builds for the rollout of FAME III.

Despite the absence of a mention of FAME III in the Interim Budget 2024, the government has introduced measures to bolster the EV ecosystem, including enhancing storage and charging infrastructure.

Notably, the government has substantially increased the budget allocation for the production-linked incentive (PLI) scheme to Rs 35 bn for FY-25, up from Rs 4.8 bn in the previous financial year.

Additionally, the allocation for advanced chemistry cells (ACC) and battery storage under the PLI scheme has been raised from Rs 120 m to Rs 2.5 bn for 2024-25.

Moreover, state governments are also offering incentives to encourage the adoption of electric vehicles, aiming to mitigate pollution levels and reduce vehicular emissions.

The Indian EV market is hotter than ever, presenting a significant growth opportunity for Hyundai India.

Nevertheless, it is always prudent to conduct thorough research before making any investment decisions.

Ensure that the investment aligns with your financial objectives and matches your risk tolerance level.

For more information on IPOs, check out the list of upcoming IPOs.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...