A bumpy ride: Hyundai Motor India's listing could be an indicator

The initial public offering (IPO) of Hyundai Motor India Ltd (HMIL) proved to be a disappointment for primary-market bulls, who have been enjoying an extraordinary run of listing gains for the past two years. The stock listed at a small discount to the IPO price of Rs 1,960 and fell further to close the first session at Rs 1,811 on the National Stock Exchange. This is in contrast to a situation where the average IPO has been listing with high double-digit or triple-digit gains. Indeed, the HMIL listing may indicate sentiment has normalised from the exuberant bullishness the markets have been witnessing. The South Korean auto giant had received muted responses to the Rs 27,855 crore IPO of its Indian subsidiary. While qualified institutional investors did oversubscribe their quota, the retail segment was undersubscribed and required institutions to bail out the issue, which was subscribed 2.3 times. Again, this is in contrast with recent history, where IPOs have been routinely oversubscribed 10 times or more.

The massive HMIL issue — the largest ever — may have suffered from the timing. The festival season often sees retail investors pulling back from the stock market as they become more focused on consumption rather than investment. It is also true that HMIL listed on a day when the broader market experienced selling pressure, which may have influenced the weak trading trend. Analysts had advised caution due to several factors. It was making a pure offer for sale, which means that the cash raised goes entirely to the parent. After selling 17.5 per cent of its stake, the parent retains over 80 per cent of HMIL equity, which implies further dilution will be necessary to meet listing norms. The dilution could put downward pressure on the stock price. The valuation was also on the higher side. While Hyundai India holds a 15 per cent domestic market share and has a good reputation, it was seeking (and achieved) a price-earnings (PE) discount of 27. Maruti Suzuki, which has more than a 40 per cent domestic market share, has a PE of 29. Long-term investors may have considered HMIL’s valuation too rich.

Analysts also pointed out that the domestic market was slow, with retail sales having declined year-on-year in September and dealers’ associations complaining about very high inventories. Weak global growth could also impede plans to grow exports using Chennai as a hub. While all this may be temporary, it may have negatively impacted sentiment. HMIL doesn’t have a high profile in electric vehicles (EVs), a fast-growing segment, and this may have made some investors more cautious. The company has also stated capex plans, committing around Rs 32,000 crore in investment over the next several years. Unless the parent decides to invest some of the IPO proceeds back in India, capex will either have to be generated through internal accrual by Hyundai India or raised from the market in some fashion. Either way, it may mean lower free-cash flows. However, all these nuances were likely ignored by the punter who bid on IPOs. The primary market has been a lottery for the past two years: Any allotment has meant cashing out with grey market premiums or quick listing gains. This pattern has been broken. It remains to be seen if the poor performance of the HMIL share is an aberration or if sentiment has really turned sour.