Hyundai Motor IPO: GMP crashes due to rich valuation fears. Check here

The company, a subsidiary of South Korean auto giant Hyundai Motor Company, plans to raise Rs 27,856 crore through the sale of shares, priced between Rs 1,865 and Rs 1,960 each.

In Short

• Hyundai Motor India IPO set to open on October 15
• Market concerns over high pricing and limited growth room
• Grey market premium falls, indicating cautious investor sentiment

Hyundai Motor India is gearing up to launch the largest initial public offering (IPO) in Indian stock market history on October 15. The company, a subsidiary of South Korean auto giant Hyundai Motor Company, plans to raise Rs 27,856 crore through the sale of shares, priced between Rs 1,865 and Rs 1,960 each. This IPO will surpass previous record offerings from companies like LIC and Paytm.

However, concerns are being raised in the market over the pricing of the IPO. Some market experts believe Hyundai Motor India has set its price too high, leaving limited room for growth after the listing.

The entire IPO is an offer-for-sale (OFS) of up to 14.22 crore equity shares by the parent company, Hyundai Motor Company, allowing existing shareholders to offload their stakes without new shares being issued. Investors can apply for a minimum of seven shares, with further purchases in multiples of seven.

Falling grey market premium (GMP)

The effects of what some analysts are calling "rich valuations" can already be seen in Hyundai Motor India’s grey market premium (GMP).

The GMP has dropped significantly to Rs 145 per share, indicating a potential gain of only 7.4% for investors. Just a few days ago, the GMP was Rs 270 per share, and at the beginning of the month, it was hovering around Rs 400 per share.

The sharp fall in the grey market premium suggests caution among investors, who may feel that the aggressive pricing of the IPO could limit their returns. While some continue to see potential, others are holding back due to the high valuation, particularly considering the company's contribution to the global market.

Views on valuation

Market experts and brokerage firms remain divided on Hyundai Motor India’s IPO. Some believe the company is worth the premium due to its solid position in the Indian market, while others are sceptical about the high valuation in relation to its contribution to Hyundai’s global business.

A recent report from Aequitas Investments stated that Hyundai Motor India accounts for only 6.5% of the parent company’s global revenues and 8% of its profitability. Despite this, the Indian unit is set to be valued at 42% of Hyundai Motor Company's market capitalisation once listed. This has raised concerns that the Indian subsidiary is being overpriced.

Adding to the scepticism, Aequitas highlighted the slowdown in the global auto sector, pointing out that car sales have declined for three consecutive months. It noted that Maruti Suzuki India, a key competitor, has a price-to-earnings (PE) ratio of 27, while global competitors like Ford have a much lower PE ratio of 11.

On the other hand, global brokerage firm Nomura India has taken a different view. In its September report, Nomura suggested that Hyundai Motor India deserves a valuation premium over Maruti Suzuki due to its stable market share in India, which has remained between 15-17% since 2008. Nomura also noted Maruti’s declining market share, giving Hyundai an advantage in the long run.

The IPO is drawing mixed reactions from other market participants as well. More clarity is expected after Hyundai Motor India holds its analyst meeting on Wednesday. Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, said the IPO is aggressively priced, especially in the current market climate. However, he also acknowledged Hyundai’s consistent performance in the Indian market over the last 25 years.

"Hyundai has managed to maintain its presence in India, even as several other auto companies have entered and exited the market. It has built a strong reputation among India's middle and upper-middle class," said Bathini.

Master Capital Services also pointed out Hyundai Motor India’s strong return on net worth (RoNW) for the financial year 2023, which stood at 23.48%, the highest among its peers. The company has demonstrated its ability to generate profits effectively from shareholder capital. Master Capital added that Hyundai is well-positioned to benefit from the growing passenger vehicle (PV) market in India, thanks to its diverse product offerings.

Despite the divided opinions, market experts believe the IPO may still attract significant attention due to Hyundai's strong brand name and the upcoming festive season, which generally boosts consumer spending. Hyundai’s established position as one of India’s leading car manufacturers and its consistent growth in market share over the years are factors working in its favour.

However, experts also warned that the massive size of the IPO could affect liquidity in the secondary market. Santosh Meena, Head of Research at Swastika Investmart, noted that while there is likely to be strong demand for the IPO, the sheer size of the offering might reduce liquidity in the secondary market, leading to volatility.

"Hyundai remains one of the strongest players in the Indian car market, and its IPO will likely see robust demand. But investors should be aware that this could lead to some fluctuations in the secondary market as funds get diverted towards the IPO," said Meena.

(Disclaimer: The views, opinions, recommendations, and suggestions expressed by experts/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 choices.)