As India's largest initial public offering (IPO) of Hyundai Motor India Ltd (HMIL) opens for public subscription on Tuesday, October 15, the excitement is laced with caution. Hyundai hopes to compete in India's bullish market, where nearly 260 companies have raised over $9 billion so far in 2024. The IPO of India's second largest automaker after Maruti Suzuki is an outright offer for sale (OFS) of 14.2 crore shares by the company's Korean parent, priced between Rs 1,865 and Rs 1,960.

The recent market corrections are weighing on the share price in the unlisted market. Before the IPO, the gray market premium (GMP), which is a rough indicator of IPO potential, continues to decline. The company's shares trade in the unlisted market with a GMP of Rs 60. Given the upper price band of Rs 1,960, there is a marginal 3% premium to the issue price – a significant drop from the premium of Rs 570 two weeks ago when the shares began trading on the unlisted market. However, gray market premiums are only a general indicator of IPO interest and can change quickly.

In addition to the subdued market sentiment, investors are also noticing some warning signs related to the IPO.

High rating

Hyundai's IPO price of Rs 27,870 crore does not provide much valuation comfort compared to Maruti, which has almost three times higher passenger vehicle market share, two and a half times higher sales volume and similar profitability, according to an ET analysis.

Many believe that the price is expensive at Rs 1,960 at the higher end of the price range. Hyundai commands a P/E valuation of 26x FY25 earnings at current price, compared to Maruti Suzuki which trades at a P/E of 22x its FY25 earnings. The P/E ratio is also above the industry average of 24.41x and well above parent company Hyundai Motor Global's P/E ratio of 5x.

Many see limited listing profits at this price. Falling gray market premiums could be one reason for the expensive pricing. “It is true that GMP has fallen significantly due to the recent market corrections. While this might dampen enthusiasm for the IPO in the short term, it doesn't necessarily reflect the long-term impact. “The long-term potential of Hyundai’s business,” said Abhishek Jain, head of research at Arihant Capital Markets. However, the company may have its reasons for the high pricing. “Hyundai's IPO requires a premium valuation for Maruti Suzuki given the company's strong support from its Korean parent, its premium models and its growing share in the SUV market,” said Prashanth Tapse of Mehta Equities.

The complete range of Hyundai for sale

Hyundai's IPO is structured as an offer for sale (OFS) where 14.2 crore shares will be sold by the Korean parent company. This means the company receives no proceeds and the entire amount goes to the parent company, raising questions about whether the IPO is really worth the hype.

Typically, an OFS is seen as a double-edged sword in an IPO as, on the one hand, it offers existing shareholders the opportunity to benefit from the early investments. On the other hand, it does not provide the company with new funds for strategic growth initiatives, unlike a sale of new shares that could be used to fund growth opportunities.

Even if the company does not receive any funds from the IPO, its cash reserves will still allow it to pursue strategic capacity expansions to achieve long-term growth and capture future opportunities in the Indian passenger vehicle market.

Additionally, the Korean parent company, which is the world's third-largest original equipment manufacturer, said the proceeds from the IPO will be used to invest heavily in new products, future technologies and research and development capabilities. Any new developments in the parent company will certainly impact the Indian entity as well.

Hyundai has ambitious plans to establish India as a global manufacturing and export hub and analysts believe this IPO is a step in that direction. Hyundai has several new model launches planned on internal combustion engine (ICE) and electric vehicle (EV) platforms in the coming quarters. The capacity expansion plan also bodes well for future growth. Hyundai has planned an investment of Rs 32,000 crore in the country over the next 10 years

“Investors should view the IPO not just as a promoter dumping shares, but as an opportunity to participate in Hyundai's evolving growth story and its efforts to capitalize on the electric vehicle market,” said Abhishek Jain, head of research at Arihant Capital Markets .

Hyundai's IPO is a strong long-term bet

There is broad consensus among analysts and brokers that Hyundai's IPO could be a strong long-term investment, with the potential to deliver significant gains to those willing to commit for the long term.

“We expect limited upside in this IPO but expect Hyundai India to deliver healthy double-digit portfolio returns in the medium to long term,” ICICI Direct said in a note. “The issue appears to be relatively fully priced, but the company has good prospects after completing its ongoing expansions,” Bajaj Broking said. Eight brokerage firms have given the IPO a “subscribe” rating for long-term investors only, reflecting wariness of immediate gains. Three more now have a standard subscription.