The Hyundai Motor India IPO is one of the most-awaited Initial Public Offerings (IPOs) in 2024. It has been generating quite a buzz in the market for being one of the largest initial public offerings (IPOs) in Indian history. However, recently, it has been making headlines for another reason and that is - the fall in GMP (Grey Market Premium).
On the opening date for IPO (15th October 2024), the Hyundai Motor shares witnessed a significant drop in GMP. As of now, the GMP stands at around â‚ą45, which was â‚ą570 previously, and this registers a staggering 89% drop.
But what are the reasons behind this significant decline? There may be several reasons, which have raised the questions on the IPO's viability and future potential. So, let’s find the top five reasons behind the falling GMP.
What Is Grey Market Premium (GMP)?
Before we learn about the reasons for the decrease in GMP, let’s first understand what is GMP and how is it important.
GMP, otherwise called Grey Market Premium, is the difference between the expected listing price of shares and their issue price in the grey market. It is calculated so that investors and traders can measure the future performance of the shares once they begin trading on the stock exchange. If the GMP value is high, then it means there is strong demand for the share in the market and the sentiments of investors are positive about the IPO. However, if it is low, then it represents negative sentiments and low demand among investors.
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Current GMP Status of Hyundai Motor IPO
- Current GMP: â‚ą45
- Previous High: â‚ą570
- Decline: 89%
Now, this current GMP is only a 3% premium over the issue price, which is set between â‚ą1,865 and â‚ą1,960.
Reasons for the Decline in GMP
Let’s discuss the major reasons why the Hyundai Motor India GMOP has decreased.
1) Complete Offer for Sale (OFS)
One of the significant reasons for the GMP drop is that the Hyundai Motor India IPO is entirely an Offer for Sale (OFS). This means Hyundai’s Korean parent company is selling all of its 14.2 crore shares. But why and how would this matter?
There would be no new funds coming to Hyundai Motor India from the IPO. As the shares are sold by the parent company, the money raised from the IPO would go to Hyundai Motor Global and not Hyundai Motor India. With this, there would be no fresh capital for growth, which develops concern among investors.
When there is investor hesitation, the interest drops, and eventually, it leads to a lower GMP.
2) High Valuation Concerns
Another reason could be the valuation of the Hyundai Motor IPO, which is quite high. At the top price of â‚ą1,960, it has a price-to-earnings (PE) valuation of 26x for FY25. This can be seen as steep compared to its competitors. Refer to the following comparison:
- Industry Average PE: 24.41x
- Hyundai Motor India PE: 26x
- Maruti Suzuki PE: 22x
- Hyundai Motor Global PE: 5x
As a result, this higher valuation has raised doubts about whether the investment is worth it, thereby, affecting demand and GMP.
3) Legal Disputes and Conflicts of Interest
A conflict or a dispute can also be the reason for this decline in GMP. The ongoing legal disputes between Hyundai and Kia due to overlapping businesses could have made an impact on the minds of investors.
Shared business interests between Kia and Hyundai might create conflicts that harm Hyundai’s market position. Also, if there are negative outcomes in legal cases, then it could hurt the company’s reputation and performance. All of this has made investors nervous, thereby, resulting in a decrease in GMP.
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4) Dependence on Non-Electric Vehicles
You must be aware of the vehicle market in 2024. Today, the market is shifting to electric vehicles. As Hyundai has a heavy focus on traditional vehicles, it could have raised concerns among investors. So, investors worry about Hyundai's ability to create a strong and affordable EV plan. They believe that without a solid strategy, future sales and growth of the company could suffer. Also, it is a known fact that companies that do not adapt to changing market trends always struggle.
5) Production Capacity and Manufacturing Risks
The success of the IPO also depends on Hyundai’s manufacturing capabilities. As the company’s production facilities are running at high capacity, it is crucial for the company to successfully start their new Talegaon plant. The company cannot afford to misestimate demand at this stage as it could result in over- or under-utilisation of the plant’s manufacturing capacity, thereby impacting the production schedules and costs. Moreover, since all vehicles and parts are made exclusively at the Chennai plant, any disruptions there could seriously affect overall performance.
Current Market Conditions
There are several other market conditions that are also influencing the sentiment around the Hyundai Motor India IPO. One of them is the decline in sales. Recent data shows a 1.4% year-on-year drop in passenger vehicle sales, with sales at 3,56,752 units in September. This refers to a tough market.
Conclusion
Overall, the major drop in the GMP value for the Hyundai Motor India IPO is due to several reasons. Whether it is the complete Offer for Sale, high pricing worries or ongoing legal issues, all these factors have created some uncertainty for investors.
Despite the current challenges, some analysts believe that Hyundai presents a long-term investment opportunity due to its operational efficiency and strong financial performance.
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(Disclaimer: The views and opinions mentioned above do not reflect Tradejini’s official position and should not be considered as investment advice.)
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