The Hyundai Motor IPO: Why the valuations have taken a reality check

India's cooling appetite for hatchbacks and sedans is proving to be a double-edged sword for Hyundai Motor India Ltd, as the country's second-largest passenger vehicles maker draws closer to an initial public offering (IPO).

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After two years of blazing growth, passenger vehicle wholesales in July fell 2.5% from a year earlier, and manufacturers have been offering discounts since May to clear stocks. While falling demand has reduced pressure on Hyundai's stretched production capacity, it has also depressed its expected valuation to $16-20 billion from $25-30 billion earlier, two people aware of the IPO discussions said.

Many factors at play

Hyundai’s valuation has been adjusted down due to several factors.

The company's capacity utilization was a steep 96% in FY24, limiting its ability to boost production, and putting it at a disadvantage against rivals such as Maruti Suzuki, Tata Motors and Mahindra and Mahindra. However, since car sales have cooled, the capacity constraint poses no imminent challenge; but, it also signals weaker growth prospects overall.

Hyundai Motor did not respond to emailed queries.

“The market’s current slowdown has turned Hyundai’s capacity constraints into a less critical issue, but it doesn’t change the fact that their growth is closely tied to the broader market,” an industry expert said on the condition of anonymity. Besides, compared to rivals, Hyundai has few new models on way, which has pressured valuation, he added.

Despite an impressive profit of around $720 million projected for FY24, Hyundai Motor India's financials call for caution. This year, the company is expected to pay out higher royalty to the Korean parent and dividends to shareholders, depressing profit and cash balances.

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Hyundai's production capacity will rise only in the second half of 2025, when its Talegaon factory near Pune adds 130,000 units of capacity. Hence, its FY25 volume growth is projected at a muted 5-6%, according to industry estimates. Consequently, FY26 profits might mirror FY24 levels or see a slight increase to around $800 million.

P-E multiple

At a price-to-earnings multiple of 20, this could position Hyundai at a $16 billion valuation. At $18.5 billion, the PE ratio would be around 23 times, comparable to market leader Maruti Suzuki. Since Hyundai Motor India filed its IPO prospectus in mid-June, Maruti's stock price-to-earnings ratio has fallen from a median of 28.9 over the last three months, to 26 in August.

Despite a strong franchise and global capabilities across powertrains, including hybrids, Hyundai has seen its market share erode; its share in the retail market currently stands at 14.2%.

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"It is a strong franchise; globally, their capabilities across powertrains are among the best—they can launch hybrids in India as well. They have a very good SUV mix, with around 65% of their portfolio consisting of SUVs. So, their product portfolio is positioned correctly where the industry is moving. However, the growth in market share has been moderating, and in the last two years, they have lost market share; so, their progress vis-à-vis others will be keenly watched," said Jay Kale, analyst at Elara Capital.

Retail market share

Hyundai has lost 190 basis points in retail market share between FY22 and FY24, while Mahindra and Tata Motors gained. Although Hyundai’s market share erosion has slowed—losing just 10 bps between FY23 and FY24—its progress in the coming years will be closely watched, particularly as it launches a series of new models including the new Alcazar, a refreshed Venue, and the highly anticipated Creta EV.

"Hyundai has a high capacity utilization rate in the Indian market, and is currently looking to add another plant in the short term as it prepares for future competition, but it simultaneously needs to invest in new products. Their global brand recognition, coupled with feature-rich and well-designed vehicles, gives them an edge in the market. It's time for them to double down their investments now as they face growing competition from Tata Motors and Mahindra, both of which are aggressively expanding their portfolios," noted Gaurav Vangaal, an analyst at S&P Global Mobility.

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Investors remain interested, albeit cautious, understanding that Hyundai’s stock offers potential despite the broader market challenges. The IPO’s anchor book is expected to be finalized by the end of this month, with the full launch anticipated by mid-September.