India's Biiiigggeeessst IPO

India’s Bigggeeessst IPO

Mumbai's famous kaali-peeli, or black and yellow, taxis are testament to a novel Made-in-India success story that may soon launch the country's largest IPO.

Many taxis are Santros, one of India's best selling cars at the turn of the century and a model that made Hyundai Motor India the country's second largest passenger car company.

Its Korean parent now seeks to sell a 17.5% stake in an initial public offering, according to a recently filed draft prospectus, for an estimated $2.5 billion, Bloomberg reports.

That, alongside over $2 billion in dividends in just the past four years (earlier data not available) and a 3.5% annual royalty payment, will help the parent make many times over the over $5 billion it's invested in India so far.

In return, the Korean chaebol has scripted an Indian manufacturing success story that counters the negative impression left by exiting American majors such as Ford and General Motors and contrasts the general image of a country overreaching its capabilities when seeking a share of the China+1 pie. India now contributes a fifth of Hyundai's global sales and is among its top three revenue countries.

"To say India is difficult as a manufacturing setup is a typical American construct," BVR Subbu, former president of Hyundai Motor India and author of Santro: The Car That Built a Company, said to me over the phone this week.

Subbu attributed the failure of US car majors to "arrogance" and a "good enough for Indian consumers" approach.

So what did Hyundai do differently?

The Korean auto giant took some bold bets to invest in local manufacturing, sourcing, distribution and technology in a nation just emerging from economic liberalization.

Hyundai incorporated in India in 1996 with an equity investment of 8.12 billion rupees, a sizeable amount then. A relatively new plant in Canada that was being shuttered was moved to the southern state of Tamil Nadu — home to an investor-friendly government, skilled workforce, guaranteed power supply, a port and an established auto component manufacturing base.

That took care of the much-feared ‘unknown unknowns’ of establishing manufacturing operations in India, Subbu writes in his book.

Barely two years later, the Santro, an adapted version of Hyundai's Atos city car, launched in India with 80% of its parts sourced locally — lowering costs by an estimated 40% and keeping the price competitive. The car turned a cash profit in the first year of commercial operations. By the time it retired, 16 years later, it had sold just under 2 million units and had also been exported to North America, Europe and parts of Asia.

Santro's success had many reasons, from offering a two-year warranty for the first time in India to re-engineering the car to survive Mumbai's monsoon with an air conditioner powerful enough to take on Rajasthan's summers to. Film star Shah Rukh Khan as brand ambassador created recall for the little known Korean brand.

Most importantly it offered Indians a choice away from Maruti Suzuki in the areas of product and pricing, according to Subbu.

Over time though, Hyundai paid a price for that initial success, finding it tough to drop the low-cost, small-car company image as consumers graduated to more premium vehicles, an auto industry veteran told me, while crediting Hyundai for expanding the supplier base, growing the market and helping India’s auto industry come of age.

Source: Company, Hyundai draft prospectus, Emkay Research

If in the early years Hyundai faced an unlevel playing field with policy often favoring incumbents Maruti and Tata Motors, it has since also benefitted from central government incentives, lower duties under trade treaties and incentives from Tamil Nadu state. Maharashtra has offered similar benefits after Hyundai bought GM's facility in the state to redevelop it as a second manufacturing site.

Hyundai Motor India now sources 77% of all supplies and parts locally and earns a fourth of its revenue from exports. It's committed to investing another 320 billion rupees over the next few years as it doubles down on regaining share in the SUV market, establishing an electric vehicle portfolio and supply chain and undertaking research on green hydrogen.

As Europe clamps down onEV imports from China, Hyundai can use India to fill the gap better than supplying from Korea, Subbu said.

While the Indian company isn't raising any money in the IPO, he expects the parent will reallocate the surplus into strengthening the company's capabilities as the industry heads into a green transformation.

Source: Hyundai draft prospectus

A three-decade-long success story is no guarantee of future performance, especially with Mahindra and Mahindra and Tata Motors snapping at its heels.

But no matter how the IPO fares, the buzz around it will achieve three things. Give India’s equity markets a second pure-play auto stock, give the Made-in-India story legs and and finally teach Indians to say Hyundai correctly.