Hyundai’s IPO Puzzle: Big Money, Bigger Questions?

The Hyundai Motor India Ltd (HMIL) IPO is a major event in the Indian financial markets, with Hyundai’s South Korean parent, Hyundai Motor Company (HMC), offering 17.5% of its stake in HMIL.

What

This IPO, exclusively an Offer for Sale (OFS), has a proposed size of $3 billion (INR 234 billion), making it one of the largest IPOs in India, potentially surpassing LIC’s in scale. However, it is not just about raising money; there are complex financial maneuvers happening behind the scenes that favor the parent company.

When

The IPO was set in motion when Hyundai filed its draft red herring prospectus with SEBI in mid-June. The exact date of the IPO is still under wraps, but it’s anticipated to be by the end of the year.

Who

Hyundai Motor India Ltd is India’s second-largest automaker, only behind Maruti Suzuki India Ltd. The parent company, Hyundai Motor Company of South Korea, is using this IPO to cash out part of its stake in HMIL, hoping to benefit from India’s high-growth market.

Where

The IPO is taking place in India, Hyundai’s third-largest market globally. The company has a strong presence here, with notable success in the mass-premium segment of the consumer automotive industry.

Why

At the heart of the IPO is the need for Hyundai Korea to address the “Korea discount”—a phenomenon where Korean conglomerates trade at lower valuations due to poor transparency and low dividends.

Hyundai sees India as a key market to unlock value, not only to boost the valuation of its Indian operations but also to benefit the parent company’s stock performance back home.

However, what stands out in this IPO are certain decisions Hyundai made leading up to it:

• Dividend Payouts: Over the last two years, HMIL has paid out nearly Rs 10,000 crore to its parent company through hefty dividend payouts. This strategy significantly reduced the cash reserves in India, which could have otherwise bolstered the company’s financial standing and raised its valuation.

Royalty Adjustments: Just days before filing for the IPO, HMIL altered its royalty agreements with HMC, increasing the royalty rate from 2.5% to 3.5% of revenue. This subtle change means HMIL will pay an additional Rs 900 crore annually to its parent, significantly impacting profits.

Valuation Mismatch: Despite Hyundai being a dominant player in India, its price-to-earnings (P/E) ratio for the IPO (21X to 24X) is notably lower than competitors like Maruti Suzuki and Mahindra & Mahindra. This gap is largely because of the large payouts and royalties being siphoned to the parent company, raising concerns about how much value is being left on the table for Indian investors.

The IPO highlights how Hyundai is capitalizing on India’s growing market while maneuvering corporate structures to benefit its Korean parent.

These practices, combined with the company’s well-known approach of tailoring vehicles for Indian consumers (focusing on features over safety), raise questions about corporate responsibility and transparency.

Why are Indian consumers and investors, who continue to reward Hyundai with substantial market share and capital, not questioning these practices?

Will Hyundai be held accountable for re-engineering cars that score poorly on safety ratings, or will it continue to be lauded for its consumer-focused features?

As the IPO buzz intensifies, the real question is whether the market will overlook these concerns in favor of the allure of features and growth potential.

Disclaimer: The views and opinions expressed in this article are solely those of the author and do not necessarily reflect the official position or viewpoint of any organization, entity, or individual mentioned. The analysis provided is based on publicly available information and personal interpretation, and readers are encouraged to conduct their own research before forming conclusions or making any financial decisions.