Why Hyundai’s IPO may have disappointed and what’s next?

Was this surprising? I am not too sure.

In some of the so-called expert WhatsApp groups, people claimed they expected the stock price to drop right from the start. Meanwhile, opinions from the research fraternity are mixed: Several well-known brokerages are recommending buying the stock, predicting a 20% rise, while others suggest selling, warning of a potential 10% fall.

But really, this is all short-term talk.

Understanding Hyundai’s core business and the broader market is crucial. The passenger vehicle (PV) sector is already quite developed, and Hyundai isn’t leading every segment in India. Anyone thinking about investing needs to keep a close eye on these aspects to make informed decisions.

Hyundai serves as a great example of how to approach this. That’s exactly what we’re aiming to do—stay informed and make smart choices.

Will India’s car market accelerate like China’s?

Before we dive into Hyundai India’s specifics, let’s first get a grasp on the Indian PV market.

Each year, companies sell around 4 million PVs in India, and growth has been modest. Although the Covid years were unusual, if you look at the growth rate since 2018, it averages about 4.5%.

To gauge future growth, it’s common to compare India to more developed markets. For instance, China has about 230 vehicles per 1,000 people and around 120 cars per 1,000 people. Given this, many expect India to eventually reach similar levels from its current rate of 36 cars per 1,000 people.

While this comparison makes sense on the surface, it depends on several factors, such as urban development and transportation improvements. Take Libya, for example—it has 490 vehicles per 1,000 people. But that doesn’t automatically mean India will follow suit, considering its much larger size and different dynamics.

In a mature market like this, growth doesn’t just skyrocket as it might with a brand-new technology that changes habits overnight. Over the last decade, PV sales have grown by about 7% annually. This rate might hold or dip slightly as other transportation options emerge.

With these trends, we could see the market doubling by around 2035, with close to 8 million PVs sold annually in India. So, keeping an eye on these factors will be key for anyone interested in the future of companies like Hyundai in India.

Can Hyundai deliver returns for investors?

Hyundai is undeniably a heavyweight in India’s PV market, but the real question is whether its business model is robust enough to continue delivering solid returns.

This hinges on whether Hyundai can maintain its market dominance and replicate past successes, which are key factors in the company’s strategy.

Hyundai’s masterstroke with premium SUVs

Hyundai has cleverly played the premiumization card, particularly with utility vehicles. It seems everyone is eagerly waiting for the next big SUV launch, and the numbers back this up. As of September 2024, 19 out of the 25 top-selling car models were utility vehicles, either SUVs or MUVs.

Utility vehicles now account for 60% of PV sales in India, a significant shift from the days when hatchbacks and sedans ruled. Hyundai’s strategy of focusing on SUVs has paid off handsomely, with its SUV sales making up about 63% of its total in 2023-24—up from around 23% in 2018-19. This is even higher than the industry average of 60%.

Hyundai has not just increased the number of SUVs it sells but also the type, focusing on mid-to-high-end variants. These models cater to young buyers who prioritize design, driving experience, safety, and high-tech features. This strategic focus has not only shifted customer preferences towards SUVs but has also moved them towards more expensive models.

This shift is having ripple effects across the industry. Maruti Suzuki, once the king of Indian roads, with every second car sold being one of its models, has seen its market share dip from nearly 50% to 40%. A major reason? Its utility vehicle offerings lag behind, comprising only about 35% of its sales.

Thanks to Hyundai’s focus on higher-priced SUVs, the average selling price of its vehicles is now around ₹9 lakh, significantly higher than Maruti Suzuki’s average of ₹6 lakh. This sizable difference highlights Hyundai’s successful strategy in a market that increasingly values premium, feature-packed SUVs.

Policy concerns

Hyundai has been growing its brand in India with the successful launch of multiple SUVs and MUVs. However, some recent decisions have raised questions about what the South Korean parent company’s strategy might be for its Indian operations.

Here’s something to consider: In the last three years, Hyundai Motor India has paid a hefty ₹18,288 crore in dividends to its South Korean parent.

To put that into perspective, this amount represents nearly all the net profits made over the last six years.

Paying dividends isn’t inherently problematic, but the context in which they are paid can raise concerns.

Typically, a company might pay large dividends if it believes the market has become saturated or if it expects future growth to come solely from existing capacities.

For more such analysis, read Profit Pulse.

For Hyundai’s operations in India, that doesn’t seem to be the case.

The company’s production is highly concentrated, with all PVs being manufactured at a single plant near Chennai, Tamil Nadu. This plant, with a capacity of 824,000 units, is currently running at 94% utilization.

Instead of distributing profits as dividends, Hyundai could potentially adopt a more aggressive investment strategy in expanding its facilities to mitigate risks and enhance production capabilities.

While Hyundai has already initiated steps by acquiring the Talegaon Manufacturing Plant (in Maharashtra), which will increase its production capacity to 10.74 million units within the next three years, a more assertive approach may be warranted given the intense competition in the segments it operates.

Maruti Suzuki, a major player, commands a larger market share by volume than Hyundai, making it a formidable competitor. Additionally, Hyundai is not just battling external competitors; it also has to contend with Kia, a brand under the same parent company.

Despite sharing a corporate umbrella, Kia directly competes for the same customer base, intensifying the internal rivalry within the market.

The company paid hefty dividends to its parent entity just before its IPO, a move that might appear short-sighted.

Also, when we look at Hyundai’s capital expenditure or capex as a percentage of net sales, it’s revealing.

Although Hyundai had a peak year in 2019-20 with 6.8% of sales going into capex, its investment levels have generally been more conservative compared to Maruti Suzuki, which hit a high of 6.7% in 2022-23.

This trend suggests that Maruti Suzuki is possibly more aggressive in expanding its operational capacities and upgrading its technologies. In contrast, Hyundai’s lower and more variable spending could imply a more cautious approach to expansion.

This difference in investment strategy can impact the ability of each company to innovate and meet future market demands, which is something investors should watch closely.

Hyundai India’s shrinking export role

Hyundai Motor India isn’t the favoured export hub it once was for its parent.

Over the past few years, the portion of Hyundai’s total exports handled by its Indian division has dropped from 24.7% in 2019-20 to just 16.6% in 2023-24, with China now becoming the preferred export base.

This shift is significant because exporting helps maintain factory utilization rates.

If the parent company isn’t looking to use the Indian facilities for exports, it means that the local demand in India needs to be strong enough to keep the plants running at full capacity.

However, as we’ve seen, Hyundai isn’t aggressively investing in expanding its manufacturing capacity in India. This likely suggests that they anticipate a slowdown in demand and see no urgent need to increase production capabilities.

What does this mean for Hyundai’s India business?

It directly impacts their profit margins and market share. Competitors like Maruti Suzuki, who have a broader presence across various vehicle segments, can afford to offer discounts to reclaim market share—especially in areas where they’re currently weaker, such as the SUV segment. This potential pricing strategy by Maruti could put pressure on Hyundai’s margins, especially since over 60% of Hyundai’s sales come from its SUV line-up. Such market dynamics could challenge Hyundai’s profitability and position in India.

A watchful eye on Hyundai Motor India

Hyundai Motor India’s IPO wasn’t as exciting as expected, and it leaves investors thinking carefully about what to do next. The company has done well with its SUV sales, but its cautious approach to spending and its reduced focus on exports suggest there might be challenges ahead.

For anyone thinking about investing in Hyundai, it’s perhaps a good idea to wait and see how things unfold. The company needs to share more about its future plans so investors can better understand where it’s headed. This information will be crucial in deciding whether Hyundai’s stock is a good buy.

In short, it’s a time to watch and wait. How Hyundai responds to these challenges and what moves it makes next will be key to gaining investor trust and affecting its stock price.

Note: We have relied on data from the annual report and industry reports for this article. For forecasting, we have used our assumptions.

The purpose of this article is only to share interesting charts, data points and thought-provoking opinions. It is NOT a recommendation. If you wish to consider an investment, you are strongly advised to consult your advisor. This article is strictly for educative purposes only. The views expressed are my own and do not reflect or represent the views of my present or past employers.

Parth Parikh has over a decade of experience in finance and research, and he currently heads the growth and content vertical at Finsire. He has a keen interest in Indian and global stocks and holds an FRM Charter along with an MBA in Finance from Narsee Monjee Institute of Management Studies. Previously, he has held research positions at various companies.

Disclosure: The writer and his dependents do not hold the stocks discussed in this article.