Hyundai Motor India's growth engine roars on SUVs, capacity expansion

The carmaker's short-term gains may stall in neutral over high valuations

With a diversified product portfolio, entrenched market position, solid manufacturing base, and technological support from its global parent, Hyundai Motor India is poised to benefit from the steady growth trend in the underpenetrated Indian passenger vehicle (PV) market. A 63 per cent contribution from the high-growth utility vehicle (UV) segment, along with capacity expansion and product launches, is expected to help it outperform its peers in the future.

Though prospects are strong, the valuation of the Rs 27,870 crore initial public offering (IPO) at the top end of the price band appears high. The country’s second-largest PV maker by volume, with a 15 per cent market share, is seeking a valuation of 26.3 times its 2023-24 (FY24) earnings, which is about 10 per cent lower than the market leader, Maruti Suzuki India. While Hyundai boasts a superior margin and returns profile, its volumes, market share, and distribution reach are about a third of Maruti’s.

Brokerages believe the company will deliver value over the long term, but there may be limited short-term gains for investors due to full valuations.

Equity research analyst Mihir B Manek of Aditya Birla Capital says, “We believe that the outlook for Hyundai remains strong due to its strong parentage, leveraging of parent technology and research and development capabilities, as well as a solid balance sheet. However, at the upper price band, Hyundai is available at a rich valuation of 26 times its FY24 earnings per share, leaving little on the table for investors.” The brokerage has issued a ‘subscribe’ rating for investors with a longer holding period.

After a strong performance over the past three years, during which sales grew at an annual rate of 19.4 per cent on the back of an 11 per cent increase in sales volume and improved margins, what could weigh on the near-term outlook (and consequently valuations) is the slowdown in the sector. Hyundai reported a subdued 4.7 per cent growth in the April-June quarter of 2024-25 (FY25) compared to the 8 per cent growth registered in FY24. Sales in September declined by 6 per cent compared to the same period last year.

While near-term growth appears tepid, the company’s portfolio of 13 models, upcoming launches, and focus on premiumisation should help it outpace peers in a sector projected to grow by 4.5-6.5 per cent annually over the next five years (with UVs expected to grow by 7-9 per cent) to reach between 5.2 million and 5.7 million units by 2028-29.

With consumer preferences shifting to UVs, which typically have higher average selling prices, a larger proportion of these vehicles will enhance Hyundai’s profitability. The share of vehicles priced above Rs 10 lakh was 48.55 per cent in FY24, up from 43 per cent in 2021-22. Exports, which account for just over a fifth of its volumes, also contribute positively to margins as they generally yield higher realisations.

Within the UV segment, the company holds a 35 per cent share in the sport utility vehicle (SUV) category, largely due to its best-selling model, the Creta, which has a 38 per cent share in the midsize SUV segment.

In the compact SUV segment, sales are led by Venue and Exter. Together, these three models accounted for 60 per cent of its sales volume in FY24. In the sedan segment, Hyundai holds a 15 per cent share, driven by the compact sedan Aura and the premium sedan Verna.

As demand picks up, Hyundai’s investments in expanding its manufacturing base will help it meet the growing demand for SUVs and electric vehicles (EVs). The ongoing capacity expansion at Talegaon, Maharashtra, along with the Chennai plant, will increase total capacity to just over a million units by 2027-28, up from the current 824,000. In addition to boosting production, the company is investing $4 billion over the next decade to optimise local sourcing of EV components (with plans to launch four EVs, including a Creta EV by the fourth quarter of FY25) and support future growth initiatives.

The industry-leading market share in the SUV segment, the premiumisation of cars, increased production capacity, and entry into the EV market are set to boost Hyundai’s future prospects, according to brokerage SMIFS. It has issued a ‘subscribe’ recommendation, citing expected revenue and margin improvements while noting that the valuations align with those of other listed players.

Given the steady growth prospects amid industry tailwinds, robust financials, and a strong SUV product lineup, ICICI Securities has also issued a ‘subscribe’ rating. However, the brokerage suggests that there may be limited listing gains from this IPO, considering the large issue size and competitive landscape, even as the company is poised to deliver healthy double-digit portfolio returns over the medium to long term.