Hyundai Motor India IPO Sees Slow Start: Deepak Shenoy Highlights Key Risks from OFS and Royalties

Hyundai Motor India’s IPO is now open for subscription, but it’s receiving a slower response from investors. This public offering has sparked discussions, especially because it’s entirely an Offer for Sale (OFS) by Hyundai’s South Korean parent company, meaning the money raised will go to the existing shareholders, not to the company itself.

Expert Opinion on the IPO

Deepak Shenoy, founder of Capitalmind, shared his thoughts on X (formerly Twitter), pointing out two important things that investors should think about before deciding on this IPO. While he didn’t strongly support or oppose the IPO, he gave some insight into areas that are often debated.

Offer for Sale (OFS) Explained

The Hyundai Motor India IPO is an OFS, where existing shareholders sell their shares. Some people criticize this because the company doesn’t get any of the money raised. However, Shenoy explains that this isn’t always bad. In cases like Hyundai, where the company doesn’t need extra funds to grow, the OFS simply allows shareholders to exit. Companies like this tend to have steady growth and might even have higher market value.

He compares this to how the secondary market works, where companies don’t make money from shares being traded between investors. The real question, Shenoy says, should be whether the selling shareholders are trying to quickly leave the company. In Hyundai’s case, this isn’t true, as they will still hold a large stake in the company after the IPO.

Shenoy wrote, “Are they selling and running away? In some startups, VCs just want to exit at any price they can get, which is a problem. But this isn’t the case for Hyundai. They’ll still be big shareholders and continue to manage the company.”

Dividends and Return on Equity (ROE)

Another issue raised is Hyundai’s decision to pay a large dividend before the IPO. Some people see this as a red flag, but Shenoy explains that the company had extra cash that it didn’t need to grow. He argues that paying a dividend can be smart because it reduces the company’s equity, which in turn improves its ROE (a measure of profitability). Hyundai’s business doesn’t need a lot of cash or debt to keep running, so taking out some cash makes sense.

Shenoy compares this to companies like Indigo, where dividends were paid before the IPO despite the need for cash, but he emphasizes that it’s fair if this is clearly disclosed.

Real Risks: Royalties and Competition

Shenoy also talks about the real risks investors should be aware of, like Hyundai’s increasing royalty payments to its parent company in South Korea. He also mentions the challenges Hyundai faces in the highly competitive Indian car market, especially with electric vehicles (EVs) becoming more popular.

Additionally, Kia, which is owned by Hyundai’s global parent, is also competing in India. This could lead to more competition between the two brands.

Shenoy concludes by saying that while some concerns about the IPO might seem small, investors should focus on the bigger risks related to Hyundai’s business. He made it clear that he won’t be applying for the IPO and doesn’t have any stake in Hyundai Motor India.

In summary, Shenoy’s analysis helps highlight important factors for potential investors to consider, even though he remains neutral about the IPO itself.