Skipping Hyundai IPO over low GMP? 3 strong reasons to apply anyway

Hyundai Motor India IPO: Unlike some recent IPOs that experienced high demand, Hyundai's offering has seen limited interest from investors over valuation concerns, with the expected listing gains also taking a hit.

In Short

• Grey market premium dip, causing investor hesitation
• Experts suggest long-term potential despite short-term risks
• Hyundai shares to list on stock exchanges on October 22

The initial public offering (IPO) of Hyundai Motors India has been a topic of discussion since it opened for bidding on October 15. Despite the buzz, the IPO, which aims to raise Rs 27,856 crore, has not seen the overwhelming response many anticipated. Hyundai's IPO is the largest public offering in India's history, yet it remains only 89% subscribed on its final day at the time the article was being written, falling short of full subscription.

Unlike some recent IPOs that experienced high demand, Hyundai’s offering has seen limited interest from investors. So far, the qualified institutional buyers (QIBs) portion has been fully subscribed, but the non-institutional investors (such as high net worth individuals) have only taken up 35% of the shares, while retail investors have subscribed to 43% of their allotted portion.

Many are concerned about the grey market premium (GMP), which has seen a dip, making potential investors hesitant. The latest grey market premium (GMP) for Hyundai Motor’s IPO, as of October 17, 2024, at 10:53 AM, is Rs 14. With a price band of Rs 1,960, the estimated listing price comes to Rs 1,974, factoring in the current GMP. This indicates an expected gain of 0.71% per share.

However, there are still several reasons why experts believe investors should consider subscribing to this IPO.

HYUNDAI’S STRONG POSITION IN THE INDIAN MARKET

Hyundai Motors India (HMI) is the second-largest player in India’s passenger vehicle (PV) market, with a significant market share of 15% in FY24. In the high-growth utility vehicle (UV) segment, Hyundai holds a 63% share of its domestic sales, outpacing the industry average of 60% and Maruti Suzuki’s 36%. Hyundai’s robust presence in this fast-growing segment indicates strong potential for future growth.

Additionally, Hyundai has over 1,350 sales outlets across India, which, while fewer than Maruti Suzuki’s 3,250 outlets, signals that there is room for further expansion. Hyundai is also continuously innovating, with a pipeline of exciting products, including the upcoming Creta EV and three other electric vehicles (EVs).

Globally, Hyundai has a wide range of EVs and hybrid models, many of which could eventually be introduced to the Indian market. Currently, Hyundai offers 13 models in India compared to over 40 models worldwide, showcasing the scope for product expansion in the domestic market.

CAPACITY EXPANSION TO SUPPORT FUTURE GROWTH

Another reason to consider investing in Hyundai is the company's plans to increase production capacity, said a report from Nuvama. Hyundai has acquired General Motors’ Talegaon plant, which will add 0.17 million units to its production capacity by the second half of FY26 and an additional 0.08 million units by FY28. This expansion will take Hyundai’s total production capacity from 0.82 million units to 1.07 million units, supporting both domestic growth and exports.

Exports currently account for 24% of Hyundai’s revenue, with key markets including the Middle East and Europe (12%), Latin America (7%), and Africa/Rest of the World (5%). With increased production capacity, Hyundai can further tap into these export markets and continue its growth story.

HIGHER RETURN ON INVESTED CAPITAL (ROIC)

Hyundai’s return on invested capital (RoIC) is impressive, standing at 177% in FY24 compared to Maruti Suzuki’s 71%. This high RoIC is primarily due to Hyundai’s efficient use of its manufacturing plants, which operate in three shifts. This results in a net asset turnover ratio of 10x, higher than Maruti Suzuki’s 8x.

Hyundai also has plans to improve profitability through localisation efforts. Currently, imports account for around 20% of the company’s cost of goods sold (COGS), but Hyundai is working on reducing this by localising the production of key parts, including powertrain components, automatic transmissions, advanced driver-assistance systems (ADAS) parts, and EV batteries. These steps are expected to enhance Hyundai’s profitability and help it maintain its competitive edge in the Indian market.

EXPERT VIEWS

Brokerages are offering mixed views on the Hyundai IPO. Nuvama Wealth Management Limited’s report highlights Hyundai’s strong position in the domestic PV market and its growth potential, particularly in the UV segment and with upcoming EV launches. The company’s capacity expansion and localisation efforts are seen as positive indicators for long-term growth.

Choice Equity Broking has rated the IPO as ‘Subscribe for Long Term,’ pointing to Hyundai’s focus on premiumisation and market expansion as reasons for patient investors to consider the offering. They also note Hyundai’s track record of consistent growth and regular dividends, making it a reliable option for those looking for stable long-term returns.

ICICI Direct and Jefferies have also expressed optimism about Hyundai’s long-term potential. They cite Hyundai’s strong financials, its expanding market presence, and future growth plans as reasons why the stock could be a good investment for those willing to hold on to it for a longer period.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts and brokerages in this article are their own and do not reflect the views of the India Today Group. It is advisable to consult a qualified broker or financial advisor before making any actual investment or trading decisions.)