Hyundai Motor India coming with IPO to raise Rs 27870 crore

Hyundai Motor India

• Hyundai Motor India is coming out with a 100% book building; initial public offering (IPO) of 14,21,94,700 shares of Rs 10 each in a price band Rs 1865 to Rs 1960 per equity share.
• Not more than 50% of the issue will be allocated to Qualified Institutional Buyers (QIBs), including 5% to the mutual funds. Further, not less than 15% of the issue will be available for the non-institutional bidders and the remaining 35% for the retail investors.
• The issue will open for subscription on October 15, 2024 and will close on October 17, 2024.
• The shares will be listed on BSE as well as NSE.
• The face value of the share is Rs 10 and is priced 186.50 times of its face value on the lower side and 196.00 times on the higher side.
• Book running lead managers to the issue are Kotak Mahindra Capital Company, Citigroup Global Markets India, HSBC Securities and Capital Markets (India), J.P. Morgan India and Morgan Stanley India Company.
• Compliance Officer for the issue is Divya Venkat.

Profile of the company

Hyundai Motor India is a part of the Hyundai Motor Group, the third largest auto original equipment manufacturer (OEM) in the world based on passenger vehicle sales in CY2023. The company has been the second largest auto OEM in the Indian passenger vehicles market since Fiscal 2009 (in terms of domestic sales volumes). The company has a track record of manufacturing and selling four-wheeler passenger vehicles that are reliable, safe, feature-rich, innovative and backed by latest technology. This is demonstrated in its portfolio of 13 models across multiple passenger vehicle segments by body type such as sedans, hatchbacks, sports-utility vehicles (SUVs) and battery electric vehicles (EVs). The company also manufactures parts, such as transmissions and engines that it uses for its own manufacturing process or sales. It has been India’s second largest exporter of passenger vehicles from April 1, 2021 through June 30, 2024.

Since 1998 and up to June 30, 2024, the company has cumulatively sold more than 12 million units of passenger vehicles in India and through exports. Its current market position is because of (i) its wide product offerings, (ii) stakeholder relationships and operations; (iii) the strong Hyundai brand in India; (iv) its ability to leverage new technologies to enhance operational and manufacturing efficiency; and (v) its ability to expand into new businesses such as EVs through innovation.

In line with its commitment to India, the company is taking steps to develop an EV supply chain and manufacturing capabilities in India through EV parts localisation and developing an EV platform in India. The company is undertaking research and development on cost-effective green hydrogen energy in collaboration with the nodal agency for investment promotion of the Government of Tamil Nadu, India and the Indian Institute of Technology Madras. Pursuant to an arrangement with the Government of Tamil Nadu dated January 7, 2024 for the development of EV manufacturing infrastructure in the state of Tamil Nadu, it may receive incentives and subsidies from the Government of Tamil Nadu upon entering into a separate memorandum of understanding in this regard. 

Proceed is being used for:

• Carrying out the offer for sale of up to 14,21,94,700 Equity Shares of face value of Rs 10 each by the Promoter Selling Shareholder
• Achieving the benefits of listing the Equity Shares on the Stock Exchanges

Industry overview

The automotive industry is a pillar of Indian economy and one of the key drivers of macroeconomic growth and technological advancement. The economic contribution of this sector is immense, with significant linkages to the manufacturing and services sectors. Automobile industry in India is one of the core industries that has expanded rapidly over the reform periods and typically accounts for a large and increasing share of industrial production, output, exports, and employment and also has made its significant position in the world market. Between Fiscals 2019 and 2024, India’s domestic Passenger Vehicle (PV) sales volume rose at 5% CAGR. This growth was despite the sales contraction (at 10% CAGR) witnessed during Fiscals 2019 to 2021. From the low base of Fiscal 2021, PV sales bounced back and grew at a healthy pace to reach a historic high of 4.2 million vehicles in Fiscal 2024. The PV industry value witnessed a healthy growth from Fiscal 2019 to 2024 period, growing at approximately 13% CAGR. The average vehicle factory prices (ex-factory prices) rose at 8% CAGR during Fiscals 2019 to 2024 period led by rising share of premium vehicles. Additionally, price hikes undertaken by OEMs for compliance with emission norms and due to increase in raw material costs provided an added push to average prices. Total sales (domestic + exports) volumes of the industry, on the other hand, grew at a subdued pace of 4% CAGR during the period. 

Going ahead, the macroeconomic scenario is expected to lend support to the industry growth with GDP projected to grow at a healthy pace between Fiscal 2024 to Fiscal 2029. India’s GDP growth is expected to outperform other major geographies in the next 5 years with an expected growth rate of 6-8%. India’s inflation levels are also expected to remain subdued in the 3-5% range, which is within the RBI’s target band. 3 years of normal monsoons is assumed0020within the 5-year outlook period and has considered positive momentum in rural demand. Fuel prices are also expected to remain near steady in the next 5 years. These favourable macro-economic factors are expected to aid the consumer disposable income levels. Besides the macro-economic factors, continued support from government in terms of policies as well as continued expenditure and investments are expected to provide an added support. The favourable demographics is an added advantage for India which is also expected to help propel the passenger vehicle industry forward.

Additionally, OEMs are expected to continue with launches of feature rich competitively priced vehicles aiding the overall demand growth. The changing consumer dynamics including younger consumer base, premiumisation, electrification, shorter replacement cycles (4-5 years currently versus 7-8 years a decade ago) will provide further impetus to the demand. Additionally, the government’s push for scrapping of old vehicles is expected to help in shortening replacement cycles and hence aid demand. Over and above these demand drivers, the capacity expansion by players like Maruti Suzuki, Hyundai Motor India, Tata Motors is expected to support the growing vehicle demand. Moreover, the expansion in the supporting infrastructure like EV charging stations and CNG pumps will also aid choices for customers across powertrains.

Pros and strengths

Second largest auto OEM in India and leading exporter of passenger vehicles: The company has been the second largest auto OEM in the Indian passenger vehicles market since Fiscal 2009 (in terms of domestic sales volumes). It has consistently been the largest auto OEM in India by sales volume in the mid-size SUV sub-segment from Fiscal 2019 to the three months ended June 30, 2024. Its 2016 India Car of the Year (ICOTY) awardee, Creta had a market share of 38% in the mid-size SUV sub-segment in the three months ended June 30, 2024. It has been India’s second largest exporter of passenger vehicles from April 1, 2021 through June 30, 2024. Since its inception and up to June 30, 2024, it exported 3.61 million passenger vehicles to over 150 countries, including to countries in Latin America, Africa, Middle East, Asia, and others.

Diverse portfolio of passenger vehicles across powertrains: The company’s current portfolio of passenger vehicles caters to a diverse customer base offering “something for everyone”. Its portfolio of 13 passenger vehicle models (including N Line models which are its passenger vehicle models that feature sporty performance features) across major passenger vehicle segments by body type include sedans (Aura and Verna), hatchbacks (Grand i10 NIOS, i20 and i20 N Line) and SUVs (Exter, Venue, Venue N Line, Creta, Creta N Line, Alcazar, Tucson and IONIQ 5). Together, the passenger vehicle segments in which it is present in India accounted for around 88% of the total passenger vehicle sales volume in India in Fiscal 2024 and around 87% for the three months ended June 30, 2024. Various passenger vehicle models have multiple engine fuel options across petrol, diesel, compressed natural gas (CNG) and EV along with diverse transmission options (MT, AMT, AT, DCT and iVT). It also seeks to become a significant player in the EV segment sustainably, and its future EV investments will be calibrated based on the expected growth of the Indian four-wheeler EV market. The following image provides an overview of its product portfolio.

Ability to identify emerging market trends in a timely manner: The company identifies emerging market trends, latent customer needs and aspirations based on it and HMC’s global network, in-depth market and product research. As a key part of the Hyundai Motor Group, it gains early access to the latest global trends in the automotive industry, technologies and features; and strive to be a front-runner in introducing passenger vehicles and technologies in India. Its R&D centre in Hyderabad, works closely with the HMC’s centralised R&D hub at Namyang, Korea. This centre in Hyderabad is being expanded to become the hub for global compact passenger vehicle R&D for HMC, including through proposed introduction of an automotive test tracking facility for its products (including EVs). This R&D centre is owned by its subsidiary, Hyundai Motor India Engineering Private Limited (HMIEPL), which also provides technical expertise to support local customisation. It tailors these global technologies and features to meet customer needs, design and aesthetic preferences in India.

Pan-India sales, distribution and after-sale services network: As of June 30, 2024, the company had 1,377 sales outlets across 1,036 cities and towns in India and 1,561 service centres across India across 957 cities and towns in India. This has grown from 1,282 sales outlets across 974 cities and towns in India and 1,422 service centres across 905 cities and towns in India as of March 31, 2022. Its sales and service network was the second largest in India in terms of the number of customer touchpoints as of March 31, 2024. It sells all its passenger vehicles, except for IONIQ 5, through its dealer network. It facilitates the sale of IONIQ 5 through “Click to Buy” with support from select franchise dealers, which enables it to understand the premium electric SUV (E-SUV) space better from the direct customer feedback. As electrification in the passenger vehicle segment in India is still at a nascent stage, the company consider this approach crucial for gaining first-hand market insight and calibrating its EV growth strategy.

Risks and concerns

Dependent on a limited number of suppliers for parts and materials: The company depends on a limited number of suppliers for the procurement of parts and materials required for its manufacturing operations. The company gets 58.37%, 58.81% and 55.05% of parts and materials supply from top 10 suppliers in FY24, FY23 and FY22 respectively. Any failure by its suppliers to provide parts and materials to it on time or at all, or as per its specifications and quality standards could have an adverse impact on its ability to meet its manufacturing and delivery schedules. Further, the company’s contracts with its third-party suppliers typically have a term of one year to 10 years which may be renewed on mutually agreed terms. Its failure to renew its arrangements with its third-party suppliers could have a material adverse impact on its operations.

Significant portion of sales volumes are derived from the sale of non-EV passenger vehicles: The company currently derives a significant portion of its sales volumes from the sale of non-EV passenger vehicles. Its EV strategy is focused on increasing EV market share by introducing new EV models supported by localisation and promoting EV adoption through a charging infrastructure. It seeks to calibrate its EV strategy and plan its EV timelines in line with market demands in India, by launching the right EV at the right price point. There is no assurance that it will be able to implement its strategies successfully. Further, the competition within the EV space has been intensifying, illustrated by the fluctuating market shares and positions of automobile companies in India that offer EVs in the passenger vehicle space. Developing its EV product portfolio including the latest technologies may also involve significant technical risks and upfront capital investments that may not generate commensurate return on investment, and its EVs may not be successful.

Depend on dealership and distributorship network for the sale of passenger vehicles: In India, the company sells most of its passenger vehicles and provide after-sale services through sales and service outlets that are operated by its dealers. Some of its dealers and distributors may prefer providing dealership services to its competitors. In addition, issues affecting dealers and distributors such as bankruptcy, non-compliance of legal requirements, failure of their information systems or any security breach or any labour unrest and slowdowns, and the adverse effects of the seasonality of sales, could lead to fluctuations in its revenue and could also negatively affect its revenue and its reputation in the industry and amongst customers. For exports, the company depends on the demand received by Hyundai Motor Company (HMC) or its regional headquarters from distributors in the countries it exports to. The company relies on HMC for its marketing and sales in the export markets and may not be able to control decisions taken to select the company or the passenger vehicle for export which could give rise to conflicts of interest. If it or HMC are unable to maintain the network of distributors, it could impact its ability to maintain or grow its export market share and expand into new geographies, which in turn could have an adverse impact on its operations, financial condition, and results of operations.

Two Group Companies are in a similar line of business: While exercising their rights as its shareholder, HMC may consider the interest of all their subsidiaries and affiliates, which may not align with its interests. This in turn could give rise to various conflicts of interest between it and HMC and its affiliates, which could impact its operations. Further, HMC, including certain companies in the Hyundai Motor Group, are engaged in businesses which may be similar to the company. For example, as of June 30, 2024, HMC holds a 34.34% stake in Kia Corporation (Kia), which operates in the automobile industry in India through its subsidiary, Kia India Private Limited. It also supplies engines to Kia for their vehicles. Given the potential product overlaps between its offerings and those of Kia in India, there is no assurance that conflicts of interest will not arise between the two businesses which could negatively impact its business and prospects.

Outlook

Hyundai Motor India is a part of the Hyundai Motor Group, which is the third largest auto OEM in the world based on passenger vehicle sales. The company manufactures and sells reliable, feature-rich, and innovative four-wheeler passenger vehicles backed by the latest technology. The company also manufactures parts such as transmissions and engines. The company’s manufacturing plant is situated near Chennai can produce its full range of vehicle models. The company’s exports its products to Africa, the Middle East, Bangladesh, Nepal, Bhutan, and Sri Lanka. On the concern side, the company depends on a limited number of suppliers for parts and materials. Any interruption in the availability of parts and materials could adversely impact its operations. Further, any failure by its suppliers to provide parts and materials to it on time or at all, or as per its specifications and quality standards could have an adverse impact on its ability to meet its manufacturing and delivery schedules.

The company is coming out with a maiden IPO of 14,21,94,700 equity shares of Rs 10 each. The issue has been offered in a price band of Rs 1865- Rs 1960 per equity share. The aggregate size of the offer is around Rs 26519.31 crore to Rs 27870.16 crore based on lower and upper price band respectively.  On performance front, the company’s total income increased by 16.06% to Rs 713,023.25 million in Fiscal 2024 from Rs 614,366.42 million in Fiscal 2023, primarily due to an increase in its revenue from operations by 15.79% to Rs 698,290.57 million in Fiscal 2024 from Rs 603,075.80 million in Fiscal 2023. The increase in its revenue from operations was largely due to increase in revenue from the sale of vehicles, parts and services, in India and outside India. Moreover, its profit for the year in Fiscal 2024 increased by 28.68% to Rs 60,600.44 million from a profit for the year of Rs 47,092.50 million in Fiscal 2023.

The company is committed to investing in R&D and new passenger vehicle launches in order to further strengthen its market position and to improve the attractiveness of its passenger vehicles to the customers. It intends to continue being one of the leading players in the Indian automobile market that is relevant for passenger vehicle buyers across the spectrum from affordable to premium segments. Further, the company’s aim is to provide customers with alternate, sustainable fuel options such as hydrogen energy. It has entered into a memorandum of understanding with the nodal agency for investment promotion of Government of Tamil Nadu and Indian Institute of Technology Madras to undertake research on cost-effective green hydrogen energy ecosystem development including establishing a hydrogen innovation centre in India. It seeks to leverage the developments from this partnership to build upon its alternate fuel strategy in the future.