Hyundai Motor IPO: Why GMP Dropped Below Rs 100 and What’s Impacting India’s No. 2 PV Giant

Hyundai Motor India (HMIL) is currently experiencing a notable decline in its grey market premium (GMP), raising concerns among potential investors ahead of its highly anticipated initial public offering (IPO). The latest GMP trends indicate a minimal upside for investors, signaling a gradual loss of momentum for the South Korean automaker in the Indian stock market.

Overview of the IPO

The IPO of Hyundai Motor India is set to open for subscription on Tuesday, October 17. With a colossal issue size of Rs 27,856 crore, it marks the largest primary offering in the history of Indian stock markets. The shares will be available in a price band of Rs 1,865 to Rs 1,960 per share, with a minimum lot size of seven equity shares. The bidding window will remain open until Thursday, October 19, 2023.

This IPO is significant as it is the first offering from a major Indian car manufacturer since Maruti Suzuki India’s IPO back in 2003. It has taken Hyundai Motor Company more than two decades to bring this offering to the public, and it is entirely an offer for sale (OFS) involving up to 14.21 crore equity shares. Upon completion of the issue, Hyundai Motor India is expected to achieve a market capitalization of approximately Rs 1.6 lakh crore.

Declining Grey Market Premium

Despite the anticipation surrounding the IPO, Hyundai Motor India’s GMP has been steadily declining in recent days. The stock, which was commanding a GMP of Rs 500 at the beginning of October, has seen its premium shrink to a mere Rs 65 per share as of the latest reports. This significant drop suggests a listing gain of only 3%, a sharp contrast to the expectations set earlier this month.

Prior to the weekend, Hyundai’s GMP was around Rs 150, with some market sources even quoting a premium of Rs 175. However, following a volatile weekend, the premium took a nosedive, settling Into double digits. This downturn has raised concerns among investors, especially since the GMP was substantially higher around Rs 350-375 when the issue was officially announced.

Concerns Over Valuations and Offer for Sale

Industry experts have expressed concerns about the fully priced nature of Hyundai Motor India’s IPO, which, despite its potential, may not offer the short-term listing gains investors were hoping for. Many attribute the declining GMP to the entire OFS structure of the IPO, as none of the proceeds will be directed to the Indian entity. Instead, the entire sum will flow back to Hyundai’s South Korean parent company.

This has caused some hesitation among investors, especially considering the large size of the offering and the recent volatility in the broader equity markets. There are also concerns about the IPO potentially draining liquidity from the Indian stock market, with fears that such a significant issue could create short-term disruptions.

However, market analysts like Kranthi Bathini, Director of Equity Strategy at WealthMills Securities, downplay the liquidity concerns. According to Bathini, there is no actual shortage of liquidity in the Indian markets, with record inflows from systematic investment plans (SIPs) and an ever-increasing number of demat accounts. The current market sentiment, he suggests, is more a result of jittery investor nerves than any actual liquidity crisis.

He also pointed out that the offer for sale should not deter investors, as the promoters have been investing in the company for decades. “Now, it’s their time to reap the rewards,” Bathini said, noting that the company’s strong financials, proven track record, and robust market positioning will continue to make it an attractive long-term investment.

Brokerage Opinions and Market Outlook

Despite the short-term concerns, several brokerage firms remain optimistic about Hyundai Motor India’s future prospects. A report from IIFL Securities highlights the company’s attractive valuations compared to its peers in the Indian automobile sector. The report also notes Hyundai’s operational strengths, although it acknowledges a gap in the company’s product portfolio, particularly in the multi-purpose vehicle (MPV) segment.

One potential headwind for Hyundai is the expected slowdown in the passenger vehicle (PV) industry in FY25, which could impact the company’s growth in the medium term. However, Hyundai has been working diligently to innovate and expand its product lineup in India. According to Nuvama Institutional Equities, the company is set to launch several new electric vehicles (EVs), including a Creta EV, as part of its ongoing efforts to capture a larger share of the growing EV market.

Globally, Hyundai has a broad portfolio of EVs and hybrid vehicles, and there is significant potential for these models to be introduced in India in the coming years. Currently, Hyundai Motor India offers 13 models in the domestic market, but this pales in comparison to its global portfolio, which boasts over 40 models.

Additionally, Hyundai is working to reduce its dependence on imports, which currently account for about 20% of its cost of goods sold (COGS). The company has plans to increase localization in key areas such as powertrain components, automatic transmissions, and advanced driver assistance systems (ADAS). Hyundai’s acquisition of General Motors’ Talegaon plant is expected to further boost its production capacity in the coming years, adding 0.17 million units by the second half of FY26 and another 0.08 million units by FY28, according to Nuvama.

Hyundai’s Position in the Indian PV Market

Hyundai Motor India holds a strong position as the second-largest player in the Indian PV market, with a domestic market share of around 14-15%. The company is also a prominent exporter of vehicles from India, capitalizing on the continued demand for its popular SUV models.

Sharekhan, in its report, emphasized Hyundai’s strong parentage, well-balanced product portfolio, and solid market positioning. The firm also highlighted Hyundai’s healthy financials, which should help it maintain its competitive edge in the highly oligopolistic Indian PV industry, dominated by a few key players, including market leader Maruti Suzuki.

At the upper end of the IPO price band, Hyundai Motor India’s price-to-earnings (P/E) ratio stands at 26.3 times its projected FY24 earnings, which many analysts view as reasonable given the company’s long-term growth potential.

In conclusion, While Hyundai Motor India’s IPO may not offer the explosive short-term gains that some investors were initially expecting, the company’s strong fundamentals and solid market position make it an attractive long-term investment. The declining GMP and concerns over the all-OFS structure of the IPO have created some uncertainty, but many experts believe that Hyundai’s track record and ongoing efforts to expand its product lineup particularly in the EV space will continue to drive growth in the future.

As always, investors are advised to consult with a qualified financial advisor before making any investment decisions, especially given the current volatility in the market.