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Hyundai's market debut sees share price decline amid concerns over valuation and industry slowdown

Hyundai Motor India experienced a notable decline of 7.2% on its market debut on Tuesday, following a lukewarm reception from retail investors to the country's largest-ever initial public offering (IPO). This response stemmed from concerns regarding a lofty valuation and a slowdown in the automotive industry.

The stock (HYUN.NS) is listed at 1,934 rupees on the National Stock Exchange, falling short of its offer price of 1,960 rupees. It experienced a drop of as much as 7.6% during trading, ultimately closing at 1,819.60 rupees, which valued the company at 1.48 trillion rupees ($17.6 billion). As India’s second-largest carmaker with a 15% market share, Hyundai aimed for a valuation of $19 billion through this offering.

The record-breaking $3.3 billion IPO had been oversubscribed more than twofold the previous week, primarily driven by institutional investors. However, the high share price relative to future earnings raised concerns among retail investors, who are worried about their potential to make gains from the listing.

Hyundai’s debut reflects a trend in which seven of India’s ten largest IPOs have witnessed share price declines on their first trading days, according to Dealogic. Losses in these instances have ranged from 5% to 27%. Analysts have suggested that Hyundai's weak debut was influenced by its high valuation, the near-term weakness in car sales, and an increase in the royalty rate paid to its South Korean parent company.

"Hyundai's issue has been stiffly priced and that seems to be weighing down on its listing as well," said Arun Kejriwal, founder of Kejriwal Research. "Besides, the volumes seen so far are driven only by institutional investors and are rather poor for an IPO of Hyundai's size."

The Mumbai listing marks Hyundai Motor's (005380. KS) first outside South Korea, and it stands as the second-largest IPO globally this year. In response to the market reaction, Hyundai India's Chief Operating Officer, Tarun Garg, stated, "Price, of course, will always be determined by the investors." He further dismissed concerns regarding the increase in the royalty rate to 3.5% from 2.5%, describing it as "in line with the market benchmark."

However, Hyundai's market capitalization is significantly lower than that of India's sector leader, Maruti Suzuki, standing at $45 billion. Analysts have been stating for some time now that the gap between their P/E ratios is narrowing. In the IPO, Hyundai was valued at a multiple of 26 to its earnings for the fiscal year ended March not far from the multiple of 29 garnered by Maruti.

The slowdown comes at a time when shares of Indian rivals have also dipped in recent weeks. Customers are delaying purchases amidst persistent inflation, resulting in a decline in car sales after two years of record highs. Hyundai's sales in India for the April to September period fell by 2.6% compared to the same period the previous year, while overall car sales rose by just 0.5%, according to recent industry data.

But Garg termed the latest slowdown as "nothing to worry too much" over, attributing it to seasonality and expressing optimism about an industry rebound. On the day of Hyundai's debut, shares of Maruti fell by 2.1%, while Tata Motors dropped 2.6%, with the Nifty Auto index down by 2.5%.

Hyundai Motor would use the sale proceeds of a 17.5% stake in its Indian unit to do "research and development with aggressive new products to compete with Tata Motors and Mahindra & Mahindra". Garg stated that the company understands what it needs to pursue a successful expansion of its passenger vehicle portfolio.

Despite the initial challenges, some key brokerages now see at least some long-term value in Hyundai shares. Nomura initiated coverage on Hyundai with a "buy" recommendation and a price target of 2,472 rupees, saying SUVs are strong in Hyundai's mix 67% contribution from the segment in the April-June quarter. Macquarie initiates coverage with an "outperform" recommendation and a price target of 2,235 rupees, saying SUV focus commands a premium in terms of P/E.