Hyundai IPO: To Buy Or Not To Buy?

When South Korean automaker Hyundai launched its first small car, the Santro, 26 years ago, people would joke about the ‘tall boy’ shape of the car. The car looked unusual or even bizarre for those times. Hyundai’s initial public offering (IPO) that opens on Tuesday, however, is no joke or something unusual. Just that the size and time could be a little worrisome.

Hyundai Motor India is launching a roughly Rs 28,000 crore IPO on October 15, the largest ever in India’s history. The price band is Rs 1,865-1,960 per share and will cross the record set by LIC's initial share sale of Rs 21,000 crore.

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Hyundai’s IPO is a first for other reasons as well. It’s the first car company to go IPO after Maruti Suzuki in 2003. It's also a multinational listing in the domestic market and there have not been too many in recent decades. That is a good sign of faith in domestic markets, both the consumer as well as investor. Not all MNCs go down this twin route. And of course it is an IPO from the East, most listed subsidiaries of MNCs in India hail from Europe or North America.

However, there are concerns regarding the IPO. Large IPOs can suck out more liquidity than there is and kill appetite for some time. They have often also coincided with market peaks, even though there may not have been a direct correlation. Then there is the price, which is quite tightly valued according to analysts. This means there is not much upside. The money that will be raised will go to the parent company and not to Hyundai Motor India.

A report in The Economic Times said that of the six mega IPOs, worth at least Rs 10,000 crore seen on Dalal Street so far, five have negative returns on listing. Not just that, IPO investors who have held on to the stock in hopes of a turnaround are still sitting on losses, according to data from Prime Database.

The rogues gallery includes companies like PayTM and New India Assurance among others. The one IPO that has continued to do well is Coal India. The only message I can take away from that is the bigger fortune under the ground than over it. Not to mention that it’s a bonus if it is government-owned. But then Hyundai’s vehicles ply above ground.

On the flip side, this is no tech company deep in losses, selling a future dream. Rather, it’s a tested product firm that has been selling cars in India for close to three decades and exporting them from its world-class factories in Tamil Nadu. The financials are strong with sales of close to Rs 70,000 crore last year with profits of Rs 6,000 crore.

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Hyundai’s margins and price-to-earnings at this point run close to Maruti, so you can see where and how it is pitched — Koreans versus the Japanese on Indian soil. Hyundai’s margins are a little better because most of its portfolio is the higher margin SUVs.

Abhishek Gaoshinde, an analyst I spoke to from Sharekhan by BNP Paribas said the Hyundai IPO is an opportunity to buy an MNC and a passenger vehicle stock given that Maruti Suzuki is the only pure-play car stock — Mahindra and Mahindra and Tata's financials also reflect their tractor and commercial vehicle businesses. He also argues that Hyundai India does not need any money as such because it is generating healthy cash so the funds going to the parent is not really an issue.

The arguments for and against seem evenly matched though the ones for are based more on fundamentals while those against are more on sentiment. It will be interesting to see what scores in the next few days. Maybe Hyundai will deliver another Santro, something people laugh at in the beginning but then embrace over time.