Hyundai’s IPO: Why It Didn’t Wow Investors and What Comes Next

Hyundai’s recent IPO wasn’t as big of a hit as many expected. But was it truly surprising? Some in investment circles, especially in expert WhatsApp groups, predicted the stock might dip from the start. Opinions among financial analysts are mixed: while some well-known firms advise buying Hyundai stock for a potential 20% gain, others recommend selling, warning of a 10% drop. Still, all of this talk mainly relates to the short term.

To make better decisions, it’s essential to understand Hyundai’s core business and the broader car market in India. The passenger vehicle (PV) sector is well-established here, and Hyundai isn’t leading every segment. Investors need to closely follow these factors before making decisions about the stock. Hyundai’s approach can serve as a valuable example—keeping informed is the best way to make smart choices.

Can India’s Car Market Boom Like China’s?

Before digging into Hyundai’s plans, let’s take a look at India’s passenger vehicle market. Each year, around 4 million cars are sold in India, with modest growth. Although COVID-19 impacted sales, growth has averaged about 4.5% since 2018.

Many people compare India’s growth potential to that of more developed markets, like China. China has around 230 vehicles per 1,000 people, while India only has about 36. With India’s population expected to reach similar levels over time, it’s possible that demand will also increase. However, many factors influence this, such as infrastructure and public transport options. For instance, Libya has 490 vehicles per 1,000 people, but India may not follow the same path due to its different conditions.

Growth in a developed sector like passenger vehicles doesn’t usually explode as quickly as it might in new tech markets. In the past decade, PV sales in India grew by about 7% yearly, which could continue or slow down slightly as other transport options expand. By 2035, PV sales might double to about 8 million units annually, making this an area to monitor closely.

Hyundai’s Prospects for Investors

Hyundai is a major player in India’s PV market, but whether it can continue delivering returns depends on its strategy and market position.

A key question is whether Hyundai can keep its edge, especially by focusing on its SUV offerings, which have been a game-changer for the company.

Hyundai’s Winning Strategy with Premium SUVs

Hyundai has capitalised on the demand for premium SUVs in India. Many buyers are drawn to new SUV launches, and data backs this trend: by September 2024, 19 of the 25 top-selling models were either SUVs or MUVs. SUVs now make up 60% of India’s PV sales, a huge shift from when smaller cars dominated. Hyundai’s SUV sales accounted for about 63% of its total sales in 2023-24, up from 23% in 2018-19. Hyundai’s SUV focus has helped it outperform the industry average of 60% for SUV sales.

Not only has Hyundai increased its SUV sales, but it has also focused on higher-end models that appeal to young buyers prioritizing style, driving experience, safety, and tech features. This approach has shifted customers toward more expensive models. In contrast, Maruti Suzuki’s market share has fallen from nearly 50% to 40%, partly because only 35% of its sales are SUVs.

Hyundai’s push for high-end SUVs has raised its average selling price to around ₹9 lakh, much higher than Maruti’s average of ₹6 lakh. This difference shows Hyundai’s success in focusing on a market that wants more premium, feature-rich SUVs.

Hyundai’s Strategic Concerns

Hyundai’s growth in India has been strong, thanks to its focus on SUVs and MUVs. But recent moves by its South Korean parent company raise questions about Hyundai’s future strategy in India.

In the past three years, Hyundai Motor India paid ₹18,288 crore in dividends to its parent company, which is nearly all of its net profits over the last six years. This isn’t necessarily a bad move, but it could indicate that Hyundai believes the Indian market may not grow much further.

Unlike other companies that might invest heavily in expansion, Hyundai has only one manufacturing plant in India, located in Chennai, with a capacity of 824,000 units, running near full capacity. Instead of distributing profits as dividends, Hyundai could increase investments in India to prepare for rising demand or mitigate risks from a single production site.

Hyundai is expanding by purchasing the Talegaon manufacturing plant in Maharashtra, which will boost its production capacity to about 10.74 million units within three years. Yet, this plan may still be conservative given the competitive pressure from major players like Maruti and even from Kia, which shares the same parent company and directly competes in the Indian market.

Hyundai’s Focus on Dividends Over Expansion

Hyundai paid out a significant amount in dividends to its parent company just before its IPO, which may not be the best long-term approach. Hyundai’s capital spending, or capex, has been relatively modest compared to Maruti’s, whose capex reached 6.7% of sales in 2022-23, whereas Hyundai’s peaked at 6.8% in 2019-20 but has since fallen. Maruti’s higher investment in expanding production and upgrading tech could give it an advantage in the coming years.

Lower capex suggests that Hyundai may be less aggressive in expansion, which could impact its ability to meet demand and innovate.

Hyundai India’s Reduced Export Role

Hyundai India no longer plays as significant a role in the company’s global exports as it once did. In recent years, Hyundai’s India division’s contribution to total exports dropped from 24.7% in 2019-20 to 16.6% in 2023-24, as China became a more preferred export hub.

This is notable because exports help keep production levels high. If Hyundai doesn’t see the Indian plant as crucial for exports, it may be a sign they don’t expect a sharp increase in local demand. Additionally, Hyundai’s cautious approach to expanding production in India may reflect a belief that demand growth will slow.

What This Means for Hyundai’s Future in India

Hyundai India’s performance in the IPO wasn’t as strong as expected, and investors are right to consider the company’s future plans carefully. While the company’s SUV strategy has been successful, its conservative spending and reduced export role indicate that Hyundai may face challenges ahead.

For potential investors, it might be wise to watch and see what moves Hyundai makes next. The company needs to clarify its strategy so that investors can decide if Hyundai’s stock is worth buying. Hyundai’s response to market dynamics and competition, particularly from Maruti and other brands, will be crucial to its long-term success.