Moneycontrol Pro Panorama | A tale of two IPOs

What explains the divergent responses of retail investors for Hyundai and Waaree IPOs?

Dear Reader,

Hyundai Motor India made a lacklustre debut on Indian stock exchanges in an otherwise bumper year for primary markets in India. The stock listed at a discount to its issue price. The IPO has got off to a weak start with muted response from retail investors. Of course, this is just the listing day and we will have to see how the stock behaves in coming months, as triggers such as festival season sales, quarterly earnings results and management commentary on the outlook play out.

In comparison, the IPO of Waaree Energies is seeing strong participation from retail investors and has been fully subscribed on the first day of the public issue. What’s more, if grey market premiums are anything to go by, Waaree is likely to list at a good premium to the IPO price.

What explains the divergent responses of retail investors? There are many reasons. Apart from uneasiness of investors with mega IPOs (think Hyundai), there is a notable difference in the growth metrics of both companies.

Waaree is seeing runaway growth, thanks to rapid adoption of green energy technologies. Revenues of the company increased by about 99 percent per annum in the past two fiscal years on average. In comparison, Hyundai’s 21 percent growth during the period looks pedestrian.

Waaree’s operating metrics compare favourably with peers. Profit margins of Hyundai, despite its superior product mix, are only 1.5 percentage points higher than Maruti Suzuki's in FY24. Moreover, while the growth of the passenger vehicle industry has slackened in India, the outlook for solar power capacity additions remains strong.

Perhaps that's why retail investors do not seem to mind putting their money in Waaree in spite of high valuations of the sector. “In terms of valuation, the IPO is coming at 30 times FY25 estimated earnings, which is at a discount to domestic listed peers (Websol and Premier Energies) despite Waaree having a far superior market position and financials,” writes Sachin Pal in this analysis of Waaree’s IPO.

Of course, as our Research Team explains in this piece, the excessive focus on short term returns and idiosyncratic factors such as the size of the public issue seem to be playing a key role in investment decisions of retail investors currently.

Also, Hyundai sells finished consumer products that tend to have sticky demand and a loyal customer base. On the other hand, Waaree sells a highly commoditised solar photovoltaic module. While Waaree did well to capture the growing business opportunity in the renewable energy sector, its business in key markets of India and the US are susceptible to changes in trade regulations and the competitive landscape.

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