On a turbulent Wednesday, market benchmarks Sensex and Nifty struggled to maintain their footing and so did Hyundai IPO
The Sensex fell over 250 points while the Nifty slipped below the 25,000 mark. Although there was some relief in the form of falling crude oil prices, the mood remained cautious, with investors reeling from weaker-than-expected earnings reports and significant foreign investment outflows.
The banking sector, along with metal, media, realty, and auto indexes, bore the brunt of the sell-off, with the Nifty media and auto indexes dropping over 1%. In particular, the much-anticipated Hyundai IPO, which had generated considerable excitement, ended up as one of the biggest letdowns in recent memory.
Hyundai IPO Fails Its Anticipated Market Debut
Hyundai’s IPO, which was highly anticipated, has tanked spectacularly, falling far short of expectations. Investors had hoped for a blockbuster performance, given the current bull run, but the results have been underwhelming, to say the least. The once-legendary “tall boy” of 1998 no longer stands tall in 2024.
So, what went wrong?
1. A Costly Blunder
Perhaps the most significant mistake was Hyundai’s IPO pricing strategy.
Indian investors, especially during a bull run, expect a “listing pop”—a solid return on the first day. However, analysts flagged that the IPO was priced at the higher end of the spectrum, dampening hopes of a sharp post-listing price jump. This not only disappointed prospective investors but also damaged Hyundai’s brand perception.
With 175 million demat accounts active in India, many of Hyundai’s customers are also investors. The lack of potential gains in the IPO during a strong market cycle made these individuals wary. Ensuring even a modest 10-15% return could have boosted goodwill for the brand. Instead, by chasing short-term gains, Hyundai may have sacrificed long-term credibility.
2. Missing the Buzz Around Listing Gains
In today’s fast-paced markets, investors are more inclined to seek short-term gains. However, many analysts predicted that Hyundai shares would be better suited for long-term holding. The problem? This didn’t appeal to a broad spectrum of retail investors looking for a quick listing pop. As a result, many investors opted to wait for post-IPO dips, missing out on the initial excitement Hyundai needed to generate buzz.
3. Retail Investor Engagement
Hyundai’s IPO was slated to attract significant interest from retail investors and high-net-worth individuals. However, the issue size meant that these groups needed to collectively invest INR 14,000 crore. Despite the number of investors getting allotments—estimated at 8 million, a figure 13 times the annual sales of Hyundai cars—the overall response remained muted. This was an opportunity for Hyundai to create positive sentiment, but the pricing and engagement strategy fell short.
4. Money Out To South Korea
In FY24, Hyundai Motor India (HMI) transferred a hefty INR 15,436 crore in dividends to Hyundai Motor Company (HMC) in South Korea. Furthermore, the IPO is anticipated to raise around INR 28,000 crore for HMC, resulting in a staggering total outflow of approximately INR 43,000 crore (USD 5.1 billion) through dividends and IPO proceeds. While these transactions are legally sound—HMC is subject to taxes, including INR 1,617 crore in withholding taxes on dividends and capital gains tax on the stake sale—the scale of this outflow has raised concerns among investors and possibly even lawmakers.
From a public relations standpoint, Hyundai mismanaged the narrative surrounding this outflow. A better communication strategy could have turned this into a positive, underscoring the financial success of HMI in a competitive market where giants like Ford, GM, and Volkswagen have struggled. Highlighting Hyundai’s ability to thrive in India’s challenging auto market could have positioned the company as a beacon for foreign direct investment (FDI), especially at a time when the government is keen to attract investments in the electric vehicle (EV) sector.
By failing to emphasize the benefits of this financial success, Hyundai missed an opportunity to mitigate the perception that it was siphoning off capital without reinvesting adequately in India. The sheer scale of the cash outflow, left unaddressed, has understandably raised eyebrows and contributed to the negative sentiment surrounding the IPO.
5. Bank Balance Woes
Another issue that has fueled skepticism is HMI’s depleted cash reserves due to its substantial dividend payouts to HMC. With INR 32,000 crore in capital expenditure (capex) plans over the next decade, concerns have emerged about the company’s reliance on external borrowings to fund its expansion. Media reports and social media posts have further fueled these concerns, speculating that HMI’s financial stability could be compromised due to its shrinking cash reserves.
After paying its parent company INR 15,400 crore in dividends, HMI is left with only INR 8,000 crore in cash. However, the company could have assuaged these fears by highlighting its robust cash flow from operations, which generated over INR 26,000 crore in the last four years (FY21-24). This strong cash flow suggests that HMI will have ample resources to fund its capex plans without significantly denting its financial health.
Additionally, HMI’s asset-light balance sheet—where cumulative capex over the past decade only slightly exceeded depreciation and amortization expenses—sets the company apart from its peers. Hyundai’s management could have been more proactive in communicating these strengths to investors, particularly the long-term sustainability of its financial performance, making the stock a more attractive buy despite short-term concerns.
6. Eastern Shores
The underlying motivation for Hyundai Motor Company’s IPO seems to be its desire to boost its valuation back in South Korea. This would be achieved by listing Hyundai Motor India (HMI)—which accounts for 8.6% of HMC’s automotive revenue—at a premium in India, thereby enhancing HMC’s overall valuation. Additionally, HMC’s goal of increasing dividends for its Korean shareholders was aided by higher operating profits and increased dividends from its foreign subsidiaries.
However, this raises a fundamental question – Is what’s best for HMC as a seller also best for the Indian investors as buyers?By focusing too much on what benefits its valuation in South Korea, HMC may have overlooked the need to ensure the satisfaction of Indian shareholders. Given the premium valuations in Indian markets, HMC needs to prioritize keeping Indian investors happy, especially as it plans future capital raises.
This issue is further complicated by HMC’s tight control over its subsidiaries, including HMI. Unlike companies like Maruti Suzuki, which have a significant presence of Indian managers in key leadership positions, HMI lacks such representation, raising concerns about whether local interests are being considered. This imbalance could potentially harm HMC’s reputation and investor trust in India.
Snapshot
Hyundai’s IPO stumble has perhaps become a case study for companies considering going public.
The lesson here is clear, an IPO is not just about raising capital—it’s about building trust, managing perceptions, and aligning the interests of all stakeholders.
From pricing strategies to understanding investor sentiment, the devil is in the details. While Hyundai’s long-term potential remains promising, the short-term pain from its underwhelming IPO will likely linger in investors’ minds. It’s a classic case of penny wise, pound foolish—ensuring reasonable returns for investors could have led to positive publicity, but instead, Hyundai’s reputation took a hit.
To avoid repeating such mistakes, companies must carefully balance their ambitions with market realities—because, in the end, the market always finds a way to humble even the tallest giants
