Hyundai IPO: Can It Close the 64% Gap With Maruti Despite Kia Stake Concerns?

Hyundai Motor India, the country’s second-largest car company after Maruti Suzuki, is preparing to list on the stock exchange. While both companies lead the Indian market, the gap between them is significant. In FY24, Hyundai sold 7.8 lakh vehicles, which is just 36% of what Maruti sold.

Higher Priced Models Drive Hyundai’s Growth

Both companies have grown at a similar pace, with a 13% increase in sales volume over the past two years. However, Hyundai’s cars are priced higher, with an average selling price of ₹7.7 lakh in FY24, compared to Maruti’s ₹5.5 lakh. This indicates Hyundai focuses on premium models, especially SUVs, which are more expensive. In fact, 63% of Hyundai’s sales in FY24 came from SUVs, compared to the industry average of 51%. This has also helped Hyundai earn a higher profit per vehicle, with an Ebitda of ₹1,17,000 per car in FY24, much more than Maruti’s ₹77,000 per car. This means Hyundai is likely to see faster profit growth compared to its rival.

Offer for Sale and Valuation Details

Hyundai’s parent company in South Korea is selling 17.5% of its stake in Hyundai India through an offer for sale (OFS), with a price range of ₹1,865-1,960 per share. At the upper end, the company is valued at ₹1.6 trillion, making it cheaper than Maruti in terms of EV/Ebitda (17x vs 21x) and price-to-earnings ratio (26x vs 30x) based on FY24 figures.

Return on Net Worth Comparison

Hyundai’s return on net worth (RoNW) for FY24 stands at 57%, much higher than Maruti’s 17%. This is partly due to Hyundai’s parent taking out ₹10,800 crore in cash through a special dividend, while Maruti retains around ₹50,000 crore in cash reserves.

Parent Company vs Indian Entity: Valuation Gap

After listing, Hyundai India could account for 40% of its parent company’s market value. However, Maruti’s market cap is more than double that of its parent company. Hyundai’s parent is currently trading at a price-to-earnings ratio of 6x based on 2023 financials, compared to Maruti’s parent at 11x.

Despite these comparisons, investors are more interested in long-term growth prospects, so they might prefer investing in Hyundai India instead of the parent company, even if the latter’s shares are cheaper. India’s high import duties—60% for cars costing under $40,000 and 100% for those above—make it tough for foreign car companies to enter the market, meaning local firms like Maruti, Hyundai, and Tata Motors dominate.

Challenges for Hyundai

A key challenge for all car companies is keeping up with new technology, both for traditional and electric vehicles, as well as maintaining a strong sales and service network. Hyundai’s royalty payments, which were around 3% of its revenue in FY24, are similar to those of Maruti and other global car manufacturers.

Concerns Over Kia Stake and Promoter Holding

One potential issue for investors is Hyundai’s parent company holding a 34% stake in Kia Motors, which could lead to a conflict of interest. Additionally, Sebi regulations require at least 25% of shares to be held by non-promoters, but after this OFS, the promoter stake in Hyundai India will still be 82.5%. This could lead to more shares being sold in the future, which might limit short-term gains when the shares are listed.