Hyundai IPO: A chaebol looks at India to break out of a Korean trap


India’s equity frenzy has attracted a global biggie which wants to ride on the high investor sentiment. Hyundai Motor India Ltd. (HMIL), the country’s second-largest car maker, is coming out with a Rs 25,000 crore IPO, which could be India’s biggest ever, in the next four to six months and will see the South Korean parent sell a stake of up to 17.5% in the company.

Just as Indian stock markets are trading near record highs, Hyundai expects the listing of the equity shares in India “will enhance our visibility and brand image”, and “provide liquidity and a public market” for the shares.

Hyundai entered India 28 years ago, and has won over buyers with its affordable cars such as Santro and sports-utility vehicle Creta. The company has plans to launch new electric vehicles, establish charging stations and a battery pack assembly unit.

While Hyundai aims to unlock value for the Indian business with the IPO, it might also help the Korean automaker shed its valuation discount compared to global and Asian peers. Chaebols, the South Korean family-controlled businesses of which Hyundai is one of the largest, are known for their low valuations for various reasons, including the governance challenges.

What is a chaebol?
Chaebol, which means a rich family in Korean, is a family-controlled conglomerate. Chaebols became national champions of South Korea. Chaebols emerged in Korea after Park Chung Hee, who seized the country’s presidency through a military coup in 1961, promoted industrialisation through multi-year economic plans. Though chaebols’ debt-driven practices were seen to be a factor behind the South Korean economy landing in a financial crisis at the end of 1997, the huge contribution of chaebols to the economy can’t be overlooked.

With big incentives, governments helped build conglomerates to industrialise the country which in turn worked in national interest, creating jobs, promoting exports and making the country a global tech power. Samsung, Hyundai and LG are some of the big chaebols which have proved highly successful globally and been instrumental in lifting South Korea to the first-world standards.For decades, the success of chaebols was linked to their proximity to the state which showered incentives and subsidies on them. But now they are thought to have gone past the benefits that come due to such an arrangement. Korean discount, the low-valuation trap
“Korea discount” is a term analysts use to refer to the typically lower valuations for South Korean companies compared to global peers due to lower dividend payouts, the dominance of opaque conglomerates and geopolitical risks involving North Korea. Hyundai’s IPO in India will help the carmaker tackle the so-called Korea discount that suppresses the value of its business back home.

Hyundai is considering a valuation of up to $30 billion for the India unit IPO, which is more than half of its Korea-listed parent which trades in Seoul at a market capitalisation of nearly $48 billion. A rich valuation for India could boost valuations at home.

In a report last year on the Korea Discount phenomenon, Jonathan Pines, lead portfolio manager for Asia ex-Japan at Federated Hermes Limited, said about one in three South Korean stocks trade below a price-to-book multiple of one, which means a company’s market cap is below the value of its net assets. Hyundai traded at a price-to-book ratio of 0.69 in Seoul, Reuters had reported in February, while Indian automakers Tata Motors traded at 6.48 and Maruti Suzuki at 4.96.

Some analysts, however, say fixing the Korea discount problem will not be so easy. “I don’t believe this is something that can be resolved simply by seeking to be listed elsewhere – although that can help fundraising and elevate their local brand image to some extent,” Lee Jung-bin, an analyst at Shinhan Securities, had told Reuters. “Having said that, it could potentially unlock better valuation than the parent company in Korea as investors could focus more on local performance there,” Lee added.

Hyundai bets on India’s animal spirits
Hyundai’s IPO plans come as India’s stock markets are soaring. The benchmark Indian indices have doubled between 2019 and 2023, while Seoul’s KOSPI index has risen just 30% in the same period.

India’s burgeoning stock market overtook Hong Kong’s earlier this year to become the world’s fourth-largest, and is seeing soaring interest in large IPOs. The combined value of shares listed on Indian exchanges reached $4.33 trillion on January 22, versus $4.29 trillion for Hong Kong, as per Bloomberg data, making India the fourth-biggest equity market globally. Its stock market capitalization crossed $4 trillion for the first time on December 5, with about half of that coming in the past four years.

Equities in India have been booming, thanks to a rapidly growing retail investor base, strong corporate earnings and steady economic growth held up by stable governance. Overseas funds poured more than $21 billion into Indian shares in 2023, helping the country’s benchmark S&P BSE Sensex Index cap an eighth consecutive year of gains. NSE data shows that in the five years between 2019 and 2023, over 120 million investors were registered.

Citigroup Inc., the top arranger of equity offerings in India this year, sees four to five IPOs of at least $1 billion each over the next year. At least 10 companies are weighing offerings of more than $100 million, according to data compiled by Bloomberg. Hyundai IPO might pull in more MNC giants to the Indian markets, attracted by high valuations they offer. A flurry of small deals has made India one of Asia’s busiest IPO markets this year. Bigger share sales brighten the nation’s chances of attracting global funds as investors rotate money amid a patchy recovery in China.

Where will the money go?
Hyundai counts India as a crucial growth market where it has two manufacturing units and has invested $5 billion, with commitments to pump in another $4 billion over the next decade. The world’s biggest car market after China and the US is the company’s third-biggest revenue generator globally.

Hyundai’s India unit has a market share of 14.5% in the recently-concluded fiscal FY24 in the passenger car segment compared with Maruti Suzuki’s 41.7% and 13.8% of Tata Motors, as per Society of Indian Automobile Manufacturers (SIAM) data. In 2023, India accounted for 13% of Hyundai Motor’s global unit sales and contributed 6% to the revenue and profit.

The listing is seen putting Hyundai on a stronger footing versus Maruti Suzuki, Tata Motors and other rivals as it could make future fundraising easier, without the need for dependency on its Korean parent. Hyundai plans to use the IPO proceeds largely to fund the launch of EVs in India, as well as set up a charging network and a battery facility, sources have told Reuters. The money will also be used to expand its manufacturing capacity in the country.

The proceeds from the IPO will drive parent Hyundai Motor’s ambitious strategy to make India a key export hub to expand its global business, besides seeking gains in the domestic market, senior industry executives have told ET. As part of this, the company plans to introduce nearly half a dozen electric vehicles over the next four years for local sales and exports, as more assembly lines come on stream in India.

(With inputs from agencies)

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