Hyundai offer has some appeal, but may not give investors first-mover advantage

Hyundai Motor India (HMI), the country’s second largest passenger vehicles (PV) maker after Maruti Suzuki India, plans to raise upto INR 27,870 crore through an offer for sale (OFS). The promoter Hyundai Motor Company (HMC) of South Korea will reduce its stake to 82.5% after the OFS from 100%. It needs to sell stake in the future as well to reduce its holding to 75% or lower as a part of the regulatory requirement. This may have a hangover on HMI’s stock price.

In addition, HMI operates in a highly competitive market. The volume market shares of Hyundai and larger peer Maruti have eroded gradually over the past five years. This apart, the IPO price doesn’t offer much valuation comfort compared with Maruti, which has nearly three times higher PV market share, two-and-a-half times higher sales volume and similar profitability. On the positive side, Hyundai has lined up several new model launches in the coming quarters on internal combustion engine (ICE) as well as electric vehicle (EV) platforms. The plan to expand capacity also augurs well for future growth. Given these factors, while risk taking investors may consider the IPO, risk averse investors may wait to see the stock price trend after the IPO.

Business
Incorporated in 1996, HMI is a full range manufacturer of PVs including hatchbacks, sedans and SUVs across different power trains. The company has a fully functional plant in Chennai with a capacity of 8,24,000 lakh units. It is currently setting up another plant at Talegaon in Maharashtra, which once fully operational will take the total capacity to 10,74,000 units over the next three-four years.

The company’s PV sales increased by 8% year-on-year to 7,77,876 units in FY24. Of this, ICE and CNG powertrains contributed 89.2% and 10.6% respectively while EV formed 0.2%. HMI’s market share in hatchbacks, sedans, and SUVs was 12.3%, 20%, and 18.4% respectively in FY24.

Financials
Revenue increased by 21.4% annually between FY22 and FY24 to INR 69,829 crore while net profit grew by 44.5% to INR 6,060 crore. The operating margin before depreciation and amortisation (EBITDA margin) improved to 13.1% from 11.6% during the period. Peer Maruti’s EBITDA margin too expanded to 13.1% from 6.4% by similar comparison.

Risks
Due to intense competition, the company’s PV market share has fallen gradually to 14.6% in FY24 from 17.6% in FY20. This may force the company to offer higher customer discounts in future to retain market share thereby affecting profitability.

Valuation
HMI demands FY24 price-earnings (P/E) multiple of upto 26.7. The closest peer Maruti trades at a P/E of 29.8.

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