Hyundai Motor India's mega IPO: Will this be a Diwali bonanza for Seoul?

Hyundai  Motor India IPO: As investors await the opening of India's largest initial public offering (IPO) of Hyundai Motor India, an Indian arm of South Korean automaker Hyundai Motor, brokerage firm Aequitas, in its research note, claimed that the biggest Diwali celebration this year is set to happen in Seoul, South Korea. Through the Hyundai Motor India IPO, which is scheduled to open for public subscription on Tuesday, October 15, 2024, Hyundai Korea is offloading Rs 25,000 crore worth of shares through an OFS in the Indian markets. 

The brokerage highlighted, saying, "From Hyundai’s perspective, it’s a no-brainer as their stock in South Korea trades at a measly 5x P/E." However, Aequitas cautioned that, given the headwinds facing the global auto industry and signs of a slowdown in India, the upcoming IPO may not be as promising for Indian investors as initially expected.

Here's what Aequitas said in its research note: 

Hyundai Global’s market capitalisation stands at $45 billion, with a price-to-earnings (P/E) ratio of 5 and a profit after tax (PAT) of $9.2 billion.  In comparison, Hyundai Motor India’s market capitalisation, based on its expected value at listing, is $19 billion, with a P/E ratio of 27 and a PAT of $0.7 billion (based on estimated FY24 numbers). 

The note pointed out that despite contributing only 6.5 per cent of global revenues and 8 per cent of profitability, Hyundai’s India unit will be valued at 42 per cent of the parent company’s market capitalisation upon listing.

That said, another favourable factor for the South Korean automaker, Aequitas said, is that Hyundai Global owns a 34 per cent controlling stake in Kia Motors, while Hyundai India does not have a stake in Kia India. Moreover, Hyundai Motor wholly owns Genesis Motors, a luxury vehicle brand in South Korea. Hyundai-Kia is the third-largest group, selling 7.3 million vehicles in 2023.

Where does the Global Auto Industry stand?

Aequitas, in its research note, highlighted significant headwinds facing the global auto industry, citing various reports. The note highlighted that Volkswagen (VW) plans to close two German assembly plants (AMS, September 20, 2024), and has slashed its outlook for the second time amid concerns over its EV and China strategies (The Driven, October 2, 2024). Stellantis' stock hit a two-year low after it reduced its annual forecast (Reuters, September 30, 2024), while Ford announced plans to cut up to 1,600 jobs (Reuters, June 12, 2024). Similarly, Nissan is cutting production in both the US and China (Automotive World, September 30, 2024).

(Source: Aequitas)

 

The note also highlighted that other major automakers are grappling with challenges. Aston Martin saw its shares drop 28 per cent following a profit warning over supply chain issues and China’s economic woes (Reuters, September 30, 2024). Mercedes cut its guidance due to sluggish demand in China and ongoing trade disputes (CNBC, September 20, 2024). BMW downgraded its 2024 outlook, citing brake issues and weak demand in China (CNN, September 10, 2024). Meanwhile, Toyota reported an 11 per cent drop in global production in August, marking seven straight months of decline (Reuters, September 27, 2024).

Is the Indian market premium justified?

Aequitas, in its research note, also highlighted the ongoing challenges in the Indian auto market, citing that Maruti Suzuki is adjusting its production to ease dealer inventories due to slower-than-expected demand (BBC, August 20, 2024). Furthermore, car sales in India declined for the third consecutive month in September, despite automakers offering hefty discounts (Economic Times, October 2, 2024).

(Source: Aequitas)

 

Hyundai Motor India reported a 10 per cent drop in sales in September (CNBCTV18, October 1, 2024), and Maruti Suzuki's stock fell by 2 per cent as domestic sales also declined in the same month (Economic Times, October 2, 2024). These factors raise concerns about whether the Indian market premium is still justified, according to Aequitas.

Aequitas concluded, "Given the headwinds that the global automobile industry is facing, coupled with signs of a slowdown in India, the upcoming IPO might not be a great deal for Indian investors."