We will discuss why Hyundai has brought its IPO despite being profitable enough to fund its future growth.

The news

Today is the second day of Hyundai’s IPO. By the end of its first day, the IPO saw an 18% subscription. It is the biggest IPO India has ever witnessed so far.

But before we talk about that, let’s see what companies usually intend to do with the IPO funds.

The Purpose of IPO

Companies go public for two main reasons

  1) Fresh Issue: Funds the company operations

  2) Offer For Sale (OFS): Exit for insiders

When a company raises fresh funds, it uses this money for capital expenditures, paying down debt, or other growth initiatives. This is often seen as a positive sign, reflecting the company’s growth aspirations.

On the flip side, when an IPO is purely an OFS, it means the proceeds from the IPO go directly to insiders selling their equity, not to the company. Here, founders or existing investors reduce their stake or exit, which might raise eyebrows.

Long story short, the proportion of OFS and Fresh Issue in IPO hints at the company’s intent to bring an IPO. Now let’s look at Hyudai’s IPO.

The Hyundai’s IPO

The largest ever in India’s primary market is set to raise ₹27,870 crores. The tricky part is that it is entirely an offer for sale.

None of these funds will be used for Hyundai’s operational needs. The South Korean parent will sell 17.5% of the total equity it holds.

Given that Hyundai Motor India has generated around ₹14,000 crore in cash from operations between FY22 and FY24. The management foresees a capital expenditure of ₹32,000 crore over the next 10 years. So the company has enough internal accruals to support its future growth.

In the past 15 months, there have been 91 IPOs. Out of all the funds raised, 61% was OFS.

Seems like the South Korean parent is also booking some of its profits after nurturing Hyundai to the second-largest car seller in India, having a market share of about 15% in passenger vehicles.

But it also seems that India’s history with large IPOs hasn’t been really good. Let’s look at some of the biggest IPOs in India and how they have performed so far.

To conclude

Historically, large IPOs in India have struggled to deliver consistent returns, making this one a test of whether Hyundai can buck the trend.

Will the Hyundai be an exception? Only time will tell.