Hyundai IPO Falters: A Dampener on India’s IPO Rush?

On October 22, 2024, India’s biggest-ever IPO saw a muted debut in the stock market as shares of Hyundai Motor India fell as much as 5.9% on the day of listing. The immense anticipation built before the launch of the $3.35-billion issue for the nation’s second-largest automaker by sales was valued at $19 billion in the IPO. 

On the contrary, other major IPOs, such as Ola Electric, Bajaj Housing Finance, and Waaree Energies, experienced strong demand and enjoyed significant listing gains and early market enthusiasm, outpacing Hyundai’s more tempered performance.

Now, coming back to Hyundai, since the day of listing, the automaker’s shares have slipped amid concerns about high valuation and an auto industry slowdown, which has led many analysts and investors to reassess their appetite for high-valued IPOs. Here’s a snapshot:

In a similar situation, the Indian stock market has also gone through a fall in the October 21-25 week, with Nifty 50 declining about 7.5% from the record high when it hit 26,277.35 points on September 27, dragged down by sustained foreign selling over the last 20 sessions. Additionally, the lacklustre in the second quarter results of India Inc. also dragged the Indian stock market from its record highs. 

This, coupled with the muted IPO debut of Hyundai IPO, reflects growing caution amid current economic uncertainties. 

But everything is not going downhill for the red-hot Indian market yet. Despite recent jitters, India’s IPO market has been buoyant, with around 270 companies raising $12.57 billion this year, well above the $7.4 billion raised in all of 2023. With 2024 nearing an end, the country has seen several high-profile IPOs alongside Hyundai, with a mix of performance outcomes on their listing days.

Here’s a quick relook:

These examples highlight that even in a frenzied market, fundamentals, valuation, and sector focus play vital roles in determining an IPO’s success.

What Led to Hyundai’s Underperformance?

A mix of market conditions, investor sentiment, and sector-specific challenges drove Hyundai Motor India’s IPO underperformance. Here are the key takeaways: 

High Valuation Concerns: Hyundai’s IPO was priced at a premium, initially dampening investor enthusiasm. Given the competitive Indian automotive market, retail investors typically seek listing gains, which appeared unlikely due to the high valuation, especially with slower growth projections in the traditional car market.

IPO Structure and Fund Utilisation: Hyundai’s 100% Offer for Sale (OFS) structure did not channel new funds into the company, potentially limiting its growth prospects. This means the sale proceeds will go to the shareholders rather than the company.

Dividend Drain: Hyundai’s rising royalty payments to its Korean parent company are problematic. The IPO faced scrutiny due to significant dividend payments made to its parent company, Hyundai Motor Company (HMC), in South Korea. It raised concerns among investors about capital allocation and growth focus, particularly in areas like electric vehicle (EV) infrastructure, R&D, and capacity expansion.

Additionally, the presence of Kia, owned by Hyundai’s global parent but distinct from Hyundai India, could introduce new competition and innovation in the Indian market.

Electric Vehicle Transition: While Hyundai has made strides in the EV market, it still relies heavily on traditional internal combustion engine (ICE) vehicles. Investors might have been wary about how quickly the company can adapt to India’s increasing EV market competition from established and new players.

Sector Challenges: The automotive sector in India has faced challenges like semiconductor shortages, increased input costs, and regulatory pressures, all of which impact profitability and operational efficiency.

Hyundai’s performance will likely depend on how well it can address these factors and align with market trends, especially in India’s evolving automotive landscape.

IPO Fervour In India

With a surge of companies across sectors rushing to go public, India has been a prime witness of IPO frenzy in recent years. EY, in its report on IPO trends, highlighted that in the third quarter of 2024, India launched more than 100 IPOs, marking its highest level of public offerings in a single quarter over two decades. 

So far this year, the Indian stock exchange saw 127 companies going public via IPO (67 main board and 60 SMEs), of which 110 IPOs gained on listing day. 

According to data, IPOs in the nation have risen by an average of 39% in their first trading day this year. Among IPOs of over $500 million, the average gain was 66%. 

Looking at the trajectory above, it seems that Hyundai’s initial decline makes it an outlier, given that enthusiasm for IPOs in general among Indian investors has otherwise been high post-listing.

Additionally, there has been a gradual shift to broader sectors, opening doors for more diverse investor opportunities. 

However, for investors prioritising long-term growth, smallcases present an appealing alternative. These curated portfolios allow exposure to diverse themes and sectors, reducing the risk tied to single IPOs. Whether through selective IPOs or smallcases, aligning with broader economic trends can enhance investment resilience.

So, how do we, as investors, gauge the trends going forward?

Key things To Watch

For investors looking to invest in upcoming IPOs or the broader stock market, there are several important considerations to bear in mind for future IPOs.

Valuation Discipline: Hyundai’s underperformance emphasises the importance of realistic IPO pricing. Investors should assess if a company’s valuation aligns with industry standards, growth prospects, and economic outlook. 

Sector-Specific Demand: IPOs in resilient sectors like pharmaceuticals, engineering, and government-backed industries (e.g., IdeaForge in aerospace) tend to be more stable. Sector outlook and demand are crucial indicators, especially for defensive sectors, which perform better during economic volatility.

IPO Structure and Fund Utilisation: IPOs that raise capital for future growth initiatives tend to attract more investor confidence, as fresh capital injection is generally seen as a positive driver for expansion.

Global Market Conditions: Global market conditions remain a significant influence. Inflation, interest rates, and geopolitical issues impact investor sentiment. 

Regulatory Environment: Regulatory flexibility may benefit some companies but could also indicate underlying market challenges that require regulatory support to stabilise.

To wrap it up…

As with most things in life – nothing is a blanket, good or bad. IPOs are no different. There are good bets and bad bets. Think and research carefully, for the IPO listings are going strong for a while. The upcoming slate of IPOs in India includes prominent names from tech to consumer services, with companies like Swiggy and Niva Bupa Health Insurance preparing to go public, each with its unique growth story and market position. The choices are many, but every IPO requires careful thought, as the market continues to be dynamic and competitive.