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Synopsis: Hyundai Motor India's forthcoming IPO is projected to be attractively valued in comparison to other listed OEMs like Maruti Suzuki and Mahindra & Mahindra, according to IIFL Securities. Hyundai's robust financial performance, high profitability metrics, and efficient operations contribute to its favorable valuation prospects.
Hyundai Motor India, a wholly-owned subsidiary of Hyundai Motor Company, South Korea, is gearing up for a potentially lucrative initial public offering (IPO). According to IIFL Securities, the IPO is expected to be attractively valued, especially when compared to other listed original equipment manufacturers (OEMs) in India such as Maruti Suzuki India Ltd (MSIL) and Mahindra & Mahindra Ltd (M&M).
IIFL Securities' recent note highlights Hyundai Motor India's impressive financial performance. The company reported a profit after tax (PAT) of Rs4,400 crore for the first nine months of FY24. Based on IIFL’s projections, which annualize this figure and apply a 10% compound annual growth rate (CAGR) for FY24-26, Hyundai's PAT could reach Rs7,000 crore by FY26. This calculation suggests that Hyundai's valuation could range between $18-20 billion, implying a price-to-earnings (PE) ratio of 21.3-23.7 times for FY26. This PE ratio is notably lower than those of Maruti Suzuki, which trades at 25 times, and Mahindra & Mahindra, which trades at 28 times core earnings per share (EPS).
One of Hyundai's distinguishing factors is its ability to maintain stable EBITDA margins between 10-13% over FY18-24, despite significant industry slowdowns and disruptions caused by the COVID-19 pandemic. Hyundai's efficiency is further underscored by its high revenue per full-time employee and a remarkable return on capital employed (ROCE) excluding cash and investments, which stood at 140-150% for FY23-FY24. Additionally, Hyundai's net fixed asset turnover ratio of 8.7 times in FY24 is about double that of its peers, who range between 4-5 times.
The upcoming IPO, if approved, will see Hyundai Motor Company offload a 17.5% stake in Hyundai Motor India. Market expectations suggest that the IPO will be launched within the next 4-6 months. Media reports have estimated the subsidiary's valuation to be around $18-20 billion.
In a previous report, Emkay Global highlighted the growth potential of the domestic passenger vehicle industry, which could see a growth rate of 4.5-6.5% annually until FY29, driven by increasing adoption of alternative fuels and a higher share of SUVs. Emkay Global also noted Hyundai's superior profitability metrics compared to Maruti Suzuki, attributed to a better product mix with a higher proportion of SUVs (63% for Hyundai vs. 25% for Maruti Suzuki) and premium market positioning.
Despite Hyundai's strengths, potential risks remain. IIFL pointed out that an expected increase in royalty rates from 2.3-2.5% to 3.5% of revenue could impact margins.
In conclusion, Hyundai Motor India's IPO is poised to attract significant investor interest due to its strong financial performance, efficient operations, and attractive valuation relative to industry peers.
Disclaimer: This article is based on information available as of June 2024 and is intended for informational purposes only. It should not be construed as financial or investment advice. Readers are advised to conduct their own research or consult with a professional financial advisor before making any investment decisions.
