Experts advise waiting for price drop as Hyundai GMP points to subdued listing

Analysts are of the view that non-institutional investors are wary of Hyundai's valuation, especially amid slowing growth in the automotive sector.

The grey market premium (GMP) for Hyundai Motor India Ltd has plummeted to around Rs 50 per share, down from Rs 570 per share in late September. This sharp decline hints at a subdued listing amidst high volatility when the shares of the auto major make their debut on the bourses on Tuesday, say market participants.

Interestingly, this comes close on the heels of a rather subdued response from retail investors -- and also HNIs -- to the IPO of Hyundai, which was the largest ever to hit the Indian stock markets.

Analysts are of the view that non-institutional investors are wary of Hyundai's valuation, especially amid slowing growth in the automotive sector.

Analysts further suggest the weak demand from retail investors and HNI was primarily because such large issues in the past have turned out to be a disappointment after listing.

Previous large IPOs, such as those of LIC and Paytm's parent company One97 Communications Ltd, also experienced significant volatility in their grey market premiums (GMP). The LIC IPO launched in April 2022 and around that time, its GMP traded at a modest Rs 63 above its issue price of Rs 949 per share, only to eventually turn negative.

Paytm's IPO followed a similar pattern. Its GMP initially indicated a premium of Rs 200 per share over the issue price of Rs 2,150, but just a few days before listing, it dropped to a negative Rs 30 per share.

Few analysts reveal that Hyundai India has funneled two-thirds of its cash reserves to its Korean parent in the last two years. More importantly, they say that the dividends paid to the parent company during this period (Rs 17,900 crore) exceeded Hyundai India’s entire profit after tax of the last five years (Rs 17,800 crore).

In FY24 alone, just before the IPO, a massive Rs 13,300 crore dividend was declared — 3x higher than FY23 and 9x higher than FY22. This aggressive cash outflow has left Hyundai India's bank balances slashed to a third of what they were two years ago, even as it plans its largest expansion in decades.

With its cash reserves depleted, the Indian unit's upcoming capex will heavily rely on loans, pushing up debt and impacting future profits. The company itself confirmed this in its DRHP, stating that reduced cash levels might force it to borrow, which could hurt its profitability and financial health. This strategy raises concerns as Hyundai Motors India now faces increased financial pressure just as it embarks on its growth plans, analysts added.

Given this backdrop, experts advise caution on Hyundai's listing day, recommending investors to wait for a few days to allow the stock price to stabilise before making any decisions. They predict limited price movement on listing, possibly trading Rs 100 to Rs 150 below the issue price post listing. This could attract retail and HNI investors who missed out during the IPO, as well as QIBs looking to buy at lower levels.

Analysts also highlight that market conditions have softened in recent months, cooling the IPO euphoria seen earlier. The Hyundai IPO, being one of the largest ever, may have further strained market liquidity. Additionally, its size implies a higher chance of share allotment for retail investors, which has dampened the GMP as demand appears absorbed by the IPO itself.

In the short term, substantial listing gains are deemed unlikely, with potential profit-taking possibly pushing the stock lower post-listing. Analysts suggest letting initial supply pressures ease before considering any entry, recommending investors look for a significant decline before buying in.

Disclaimer: The views and investment tips expressed by experts on Moneycontrol.com are their own and not those of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.