Hyundai is gearing up for its IPO and that could make Maruti feel some heat

Hyundai Motor Corporation, the South Korean automaker, is gearing up to list its Indian subsidiary and is likely to file papers with the markets regulator Sebi in May or June to raise $3 billion. This puts the valuation of Hyundai Motor India Ltd, India's second-biggest automaker by market share, at up to $30 billion. This could be India's largest IPO, eclipsing the largest yet of $2.6 billion by Life Insurance Corporation (LIC).

The $30 billion valuation here is more than half of its market capitalisation of around $47 billion in Seoul. Amid reports of the Hyundai IPO, there is significant curiosity among investors about the implications for Maruti Suzuki India Ltd (MSIL).

Domestic brokerage Emkay has already revised Maruti Suzuki India Ltd’s (MSIL's) rating to 'reduce’ from ‘add’ citing a large upside. Emkay has, however, retained the target price of ₹10,700 per share.

"We believe MSIL could trade at similar valuations as Hyundai, amid Suzuki’s large India dependence and Toyota’s support and alliance, offset by Hyundai’s strong global standing and premium positioning. Potential small-car recovery (akin to commuter motorcycles) and MSIL’s E-SUV launch in October (the industry’s first-born EV launch) are added upside risks," Emkay analysts wrote in a recent note.

They believe that Maruti Suzuki's "best of profitability appears to be behind" as India's car market leader hit peak margin performance in the second quarter of FY24 at nearly 13% backed by factors such as volume growth, new launches (especially SUV mix), positive commodities and forex trends, and low discounts.

The third quarter, however, saw a drop in margin (at 11.7%), with underlying trends weakening for Maruti Suzuki, such as slowing retails amid rising inventory, a rapid run-down in the order book and rising discounts even in sports utility vehicles (SUVs).

In its recent analyst call, Maruti Suzuki indicated a modest 3% industry growth expectations for FY25E, with no imminent entry-level revival seen yet. The only major launch from the carmaker will be its electric SUV EVX around October 2024.

Not just Emkay, the Street is closely watching Maruti Suzuki’s leadership in the base and small car segments, where it once used to enjoy complete dominance.

Brokerage firm Macquarie in a recent note also said that Maruti is losing market share in the ₹4 lakh-7 lakh base model price segment, which includes hatchbacks and micro-SUVs.

For instance, Maruti Suzuki's Alto is no longer in the top 10 cars sold in January 2024. While its Baleno sold 19,630 units in the month, Tata's compact SUV Punch took the second spot with 17,978 units. India's car market leader, however, still has seven models in the top 10 list, but the share of its bread-and-butter models such as Swift and Dzire has reduced in recent months, with Tata's Nexon ahead of these two in the list at the fourth spot.

Hyundai India's high-margin SUVs, such as Creta and Venue, have helped the South Korean carmaker close in on the market leader in revenue and profitability over the last few years.

Hyundai's premiumisation strategy has been delivering better returns—the average realisation of Hyundai cars in FY23 stood at ₹8.29 lakh per unit compared to Maruti's nearly ₹5.8 lakh per unit. The EBITDA per vehicle for Hyundai India was ₹1.15 lakh compared to Maruti's nearly ₹56,000 in FY23.

While Hyundai has appointed investment bankers JPMorgan and Citi to advise it on the IPO as per news agency Reuters, the Street feels MSIL, the usually preferred auto stock for ages, could feel some heat.