Hi everybody Hyundai is one of the most iconic companies to enter the Indian markets and it is so hard to believe that a South Korean brand which was once a difficult name to pronounce today the same brand is about to launch the biggest IPO in the history of India Indian stock markets could soon see their biggest ever.
IPO South Korean automaker Hundai is gearing up for a significant Milestone going public in India Hyundai’s IPO po to be one of the largest in recent times this could be the biggest IPO uh that has ever happened in India this would be India’s largest IPO and the first van automaker since maruti Suzuki in 2003 in 1996 when Hundai entered the Indian.
Market maruti was the most dominating player with a 60% market share and amongst the middle class maruti was almost a monopoly in India but even then Hundai came in with santro i1 10 I20 and creta and it put a dent in the Indian automobile sector to such an extent that today it is the second largest automaker in the country with a profit of.
4,653 crores and if you look at the profitability Hyundai is way ahead of maruti in fi23 while Hyundai made a profit of 65355 rupees per vehicle maruti made a profit of 4,939 rupes per vehicle so after 28 years of getting a very stronghold of the Indian market now Hyundai plans to.
Raise 25,000 crores with its IPO sounds fantastic right but you know what guys there are some hidden risk that Hundai faces which may ruin all the progress that they’ve made in India and all of this is mentioned in this 436 page drhp paper that Hundai filed with sebi so we went through all this data so that you can sit back and consume the most.
Important bits of this 400 page document as easily as watching a movie so in this episode today let’s dive into understand how did a South Korean company like Hundai break into the Indian automobile Market leaving the tatas and mahendras behind in spite of being a foreign company how did Hyundai achieve such high profitability and outpa a mammoth.
Like maruti in India and most importantly after making such an amazing progress what are the hidden risks that can topple the growth of Hundai in India also guys a quick disclaimer I am not a se- registered investment adviser and this video is not meant to give you investment advice but to only educate you about the rise of Hyundai in.
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To 100% And applications are open right now so if you want to become a brilliant business leader apply for scaler School of Business using the link in my description and in the comment section and now on with the episode people the first thing you need to understand about a company is their philosophy of success in this case you.
Need to understand what exactly is the philosophy that turned Hundai into what it is today in India because because like we saw in the Boeing video no matter how much profitability eitaa or earnings per share a company has if it deviates from this core philosophy all these numbers will go for a toss so let’s understand the core philosophy and.
Then we’ll move on to profitability Aba and other numbers now the question over here is what exactly is a secret recipe of Hundai success in India this is a story that dates back to early 1990s India until this point India only had a few car brands and these Brands were Hindustan ambass and Contessa Premier padmin standard Herald and 2000 maruti.
800 Omni and Gypsy and a range of Mahindra Jeeps but in 1991 our finance minister Dr Manmohan Singh liberalized the Indian economy to invite foreign direct investment in India we have to harness all our latent resources for a Second Industrial Revolution and a second Agricultural Revolution our economy poity and Society have to be.
Made extraordinarily resilient and alert if we are to take full advantage of the opportunities and to minimize the risks associated with the increasing globalization of economic processes we have to accept the need for restructuring and reform if we are to avoid an increasing marginalization of India in the evolving World economy this.
Is how after liberalization foreign automobile companies rush to India and when they entered India if you look at the approach that these foreign companies had it was very very specific most companies only wanted to cater to the rid and sell only premium cars in the Indian market so India saw high-end cars like Lancer opal asra and Ford.
Ecosport and it does make sense right if you’re going to enter a new country with a high cost product like a car it is obvious that you have to sell to the rich first make money and then bring products for the bottom of the pyramid but when it came to Hundai they simply took a step back and identified four important gaps in the market number one.
The Indian automobile Market did not respect the customer at all so the customers back then were put on weight list for months after sale service was absolutely terrible and everything from customer satisfaction to customer feedback was completely taken for granted secondly they found that the compact cars back then were not solving.
For the India specific problems for example for Indians who used to wear a turban the height of the car was too small similarly the coolant system was not capable enough of cooling down a car in 35 to 40° C atmosphere and most importantly the cars were often damaged due to poor road conditions and Monsoon Seasons this is the second Gap that they.
Found in the market and thirdly they found that it wasn’t just the middle class even the wealthy people wanted to buy several compact vehicles per household for their convenience so while the sale of midsize Vehicles barely touched 30,000 units Hyundai realized that the compact vehicle segment had the potential to touch 60 to 80,000 units in.
Annual sales so the three gaps were sellers Market leading to unhappy customers ill suited designs for India and an untapped customer base in the upper class and this is why ladies and gentlemen Hyundai launched an iconic compact car for India which went by the name Hyundai sandum what’s unique about the santro the most powerful ET Salon.
Engine computerized multipoint fuel injection santro actually drives longer per liter or be bar maybe driving is you santro back then was a complete value for money for the Indian consumers because they focused on the smallest of the details that no other car companies noticed for example for Indians who wore turbines the height of the vehicle was.
Increased if you remember santro back then was called as the tall boy model and lastly they improved their air conditioning system to such an extent that their air conditioners could cool down their cars even when the outside temperature was 35 to 40° C this is how Hyundai meticulously designed a model model specific for the Indian consumer.
And you know what guys to take it to another level While most companies were trying to manufacture outside of India Hyundai convered to India to such an extent that they set up a large scale manufacturing plant in India itself and this insane move gave them two incredible superpowers to dominate the Indian market number one was lowcost.
Production and number two was the superpower of producing cars at scale for the next 30 Years so santro was not just a highquality car with features it was also a cost effective car and cherry on the cake they made sure that they had dealerships in not just Tier 1 cities but also in tier 2 and tier 3 cities and by the way.
One of the most amazing things that Hundai did to familiarize themselves with India was to hire Shah ruk Khan as their brand ambassador this is how by adopting a localization strategy by focusing on better services in tier 2 and tier 3 cities by customizing a car specifically for the Indian requirement and most importantly by getting close to.
The customer with Shah ruk Khan santro became a huge success in the Indian market and did they stop here obviously not Hundai went on to find another Gap in the market in the early 2000s during this time if you remember the market either had small hatchbacks like santro maruti Ritz or a maruti Alto and it had premium luxury cars like Honda City.
Honda Civic or an Audi A6 so if you look at this Market there was a huge gap for a mid-range product it’s like saying today there are only Vivo range products and apple range products and this means what there is a huge space for a OnePlus type product in the market which is a mid-range or upper mid-range product just like this during the early 2000s.
The market was segregated between economy and premium cars so discretly that the middle class people only had the option of small hatchbacks so they had to settle for an aluto and there were no other options available which could give them an upgrade and this is where the aspirational middle class of India yearned for something better than.
Alto but cheaper than the premium C and guess what here’s where Hyundai saw an opportunity in 2007 they launched I 10 followed by I20 in 2008 so if you see they launched both a mid-range and an upper mid-range product in the Indian market and not so surprisingly both these cars were a massive hit in the Indian market why because the customers.
Got premium features at a reasonable price they got I 10 for 3.5 to 6 lakh rupees and they got I20 between 4.2 to 8 lakh rupees on top of that these cards had multiple variants fresh and vibrant colors and most importantly just like OnePlus phones back then they looked premium but did not cost premium so again as we all know both I10 and I20.
Became a massive hit in the Indian market and then Hundai did it for the Third time in 2016 this time they did it with Keta so back then if you studied the SUV Market you would have seen that only 10% of the cars sold at that time were SUVs and this included Inova Safari and Scorpio but yet again there were no.
Midsized SUVs with a competitive price range of 8 to 9 lakh rupees along with premium features of power and efficiency and while the customers perceived duster to be too old and cheaply made ecosport was too small and Scorpio and Safari were considered to be basic so again Hyundai saw this as an opportunity and launched a midsize SUV called hundi Keta.
In f56 and when they launched Keta Keta had everything from space to premium Interiors to a long list of features without being as expensive as premium cars so again it was a big big hit in the Indian market in fact in February 2024 Keta achieved the Milestone of 10 lakh sales in the domestic market and today Hundai is the biggest midsize SUV.
Seller in India with a 30% market share this is the third leap that Hundai took in the Indian market and now they’re taking the fourth leave with Hundai Kona so do you realize what is the philosophy of Hundai they are never the first moves in the market but they study the market so well that when they bring out a product it is always a value for money.
Product which eventually capitalizes on the existing gaps in the market to such an extent that it gives them a huge Edge in the market sandrew did this to maruti it 10 did this to Alto and creta did this for duster Scorpio Safari and Inova and lastly Hyundai provided its customers with an incredible after sale service in Tier 1 2 and three cities.
Without ignoring any of them if this is very very clear to you youve understood the philosophy of growth that Hundai has followed from 1996 to 2024 so at any given point in time if the company deviates from this philosophy you will be able to sense it as an investor if this is clear now let’s move to the numbers let’s start with their.
Profitability if you look at ABA margins Hyundai is very close to maruti Hyundai’s eitaa margins for 9 months ending on December 23 it stood at 12.7% whereas Mar stood at 133% and Tata Motors stood at 6.1% but the question over here is how did Hyundai reach such high profitability well the first reason is.
Their premiumization strategy long story short while maruti sells low margin high volume products like hatchbacks Hyundai sells high cost high margin high volume products like SUVs if you see this chart while Hundai India gets 66% of its domestic volume from SUV body style Vehicles marui gets gets 70.5% of its volumes only from hatchbox secondly.
Hyundai has the superpower of something called free cash flow now what is free cash flow free cash flow is basically the money that is left with the company after paying all its expenses and taxes and here’s where some people might get confused between profit after tax and free cash flow but this is a very very important concept so if you don’t.
Understand the difference between free cash flow and Pat here’s a very very simple explanation of of the same if you know it please skip to this time stamp so let’s take the example of a bakery let’s say this Bakery generates a revenue of 5 lakh rupees and in this Bakery just like any other company there are multiple categories of expenses.
Firstly we have operating expense of 3 lakh rupees which includes salaries rent and raw material cost then we have an interest expense of 20,000 rupees this is the money that the bakery has to pay as Emi for the loan that it took to buy a fridge then we have a capital expenditure of 40,000 RUP this is the money that was spent on.
Those things which will help the bakery generate more cash in the future so they are assets like mixers and industrial ovens and lastly there is tax to be paid which comes out to be 50,000 Rupees now mind you guys for the Simplicity of calculation we are not considering depreciation and amortization and we are assuming that the working capital does.
Not increase each year otherwise this calculation will become too complex so coming back to the calculation after doing all this math here’s how the profit after tax is calculated operating income equals total revenue which is 5 lakh rupees minus operating expenses which is 3 lakh rupees eventually this number comes to 5 – 3 lakh rupes which.
Is 2 lakh rupees then we have an interest expense of 20,000 rupees so if you want to calculate profit before tax it is 2 lakhs minus 20,000 rupes equal to 1.8 lakh rupes and then if you remove taxes from profit before tax you will get profit after tax so from 1.8 lakh rupees when you remove 50,000 rup you will get 1.3 lakh rupees as profit after.
Tax if this is very very clear to you let’s move to free cash flow people free cash flow or FCF is the cash generated by the bakery after paying all its expenses and after spending money on necessary Capital Investments so out of this 1.3 lakhs that it generates we need to subtract this 40,000 rupees in capital expenditure if you remember back.
Then we did not subtract 40,000 rupees of capital expenditure from our Revenue so now after you get your profit after tax and then you remove your capital expenditure the free cash flow left with the company is 1.3 lakh rupees minus 40,000 rupees equal to 90,000 rupees so this 90,000 rupees will remain untouched regardless of your expenses and your.
Taxes so long story short free cash flow is the amount that is left with a company which practically remains Untouched by taxes capex or expenses now in the context of an automobile company like Hyundai free cash flow is very very important for three reasons number one it tells us how much money a company is left with after it makes its investment.
Into machines and factories so if a company generates 100 crores in Pat but has to invest 99 crores into building a plant then practically the company is walking on the border of a cash trap with just 1 CR rupes right because automobile business is a cash intensive business so even though an automobile company generates a lot of profits it is.
Very important to know how much free cash flow they have so free cash flow for an automobile company tells us how safe a company is after making their heavy Investments so if the company has a lot of free cash flow it means that in the future this company will have have the capacity to invest very heavily on futuristic infrastructure this is a.
Second reason why FCF is very very important for example even with the pad of 1,000 crores if an automobile company is only left with 10 crores in free cash flow then it says that they may not be able to invest in heavy EV infrastructure in the future or it could also say that they’re currently investing in heavy EV infrastructure at.
The same time if a company has 500 crores in profits with 400 crores in free cash flow it says that the company has the superpower to invest in futuristic infrastructure this is a reason why free cash flow is considered to be a superow and lastly free cash flow tells us how much money could a company distribute in dividends and.
Share buyback because this is the money that they can give back to the shareholders if you remember this is the untouched money if this is very very clear to let’s see how much free cash flow Hyundai has people if you look at Hyundai’s FCF Hyundai’s free cash flow stood at at a staggering 93% of their profit after tax between fi21 and the.
First 9 months of fi 24 so it is absolutely brilliant and this brings us to the third superpow which is even more powerful and even more mindblowing this is something called negative working cycle now for all the non-commerce students this might be a little complicated but don’t worry we’ll understand this using a simple example.
Let’s say think motor starts the production of a batch of cars which will cost 1 lakh rupes each to manufacture so to manufacture this batch think Motors will Source all of its raw materials from its suppliers on a 50-day credit which means what think Motors would pay their suppliers 5050 days after buying the materials so after buying the raw.
Materials it takes think Motors 40 days to manufacture this batch of cars inspect them for quality and then to transport them to dealerships and during these 40 days the cars are considered to be a part of of think Motors inventory and this time is called inventory days as in the number of days it takes for the company to sell its inventory if.
This is clear let’s move ahead now after the dealer gets the cars from the company the dealer will sell these cars to the customer receive cash from the customer and then the dealer will pay think Motors now let’s say the dealer has a credit period of 30 days and during these 30 days he sells these 100 cars and pays the company during these.
30 30 days the revenue from the sale is recorded as receivables and this 30-day time period is called receivable days so if you see this entire process it takes about 70 days for the car to get manufactured and then to be sold but the catch over here is that during this 70-day time period on the 50th day think Motors will have to pay suppliers for.
The raw materials that they provided why because they made an agreement with the suppliers that they will pay these suppliers 50 days after purchase and these 50 days are called payable days as in the number of days a company takes to pay its suppliers in this case think Motors has negotiated terms with its suppliers to pay them after 50 days.
Of receiving the raw materials and now let us calculate the working capital cycle and then I’ll tell you what it exactly means okay so let’s do the math first working capital cycle is inventory days plus receivable days minus payable days which is 40 days plus 30 days minus 50 days so the number comes out to be 20 days so this means think Motors will.
Have to make the payment to its suppliers 20 days before they get their money which means what they will have to lock in their capital for 20 days and when it comes to automobiles this 20-day lockin Capital could run into hundreds of crores this is how automobile companies usually operate whereby they have to keep their 20 to 22 days of.
Capital locked in the working cycle itself but you know what guys when it comes to Hyundai they are so so magical that they receive their money 26 days before they pay their suppliers so if I were to explain this with hypothetical numbers their equation would look something like this they buy raw materials from suppliers on a 96.5 day.
Credit cycle manufacture and Supply inventory to the dealer in 40 days and the dealer sells the cars and pays Hyundai in just 30 days so in 70 days the product is sold and the money comes back to Hundai but the catch over here is that they would still have 26.5 days to pay for the inventory so do you realize how magical this is Hyundai has.
A working capital cycle of minus 26.5 days which means Hundai doesn’t need to use a large chunk of its capital at all it can simply use the money that it is getting from its customers to pay its suppliers in fact it has free money for 26.5 days which it can use for further investment and according to an economic Times article while maruti has a working.
Capital cycle of- 22.5 days Hundai has a working capital cycle of- 26.5 days this is the reason why if you look at their third parameter which is return on Capital employed while Hundai has a return on Capital employed of 27.1 n% maruti stands at just 19.7% so for every 100 rupee that Hundai invests in its business it earns a a.
Return of 27 to 28 rupees whereas for every 100 rupe that maruti Suzuki invests in its business it earns a return of 19.7 rupes so all of this looks fantastic right then the question is why did I say that Hyundai also has some hidden challenges and risks that you should be aware of well that is because ladies and gentlemen there are.
Three things that you need to look at and be concerned about firstly Hyundai has two plans in Chennai and both of them are operating at 103% and 92% utilization so it will be very difficult for Hyundai to cater to the rising demand of cars and increase its market share so because of less capacity they are producing less Vehicles which is.
Increasing the wait time for its buyers in fact the waiting period for Hyundai cars can go from 6 weeks all the way up to 24 weeks now you might say bro that is why they are raising money through IPO now so the IPO will solve all these problems right wrong because here’s where the second pointer comes in which is the purpose of the IPO people this.
IPO is an offer for sale IPO meaning the entire IPO money is going to the promoters of the parent company so in simple words it means that the money raised from the IPO is actually going out of the country to the promoter sitting in South Korea and not for the growth of the local business in India and last and most importantly while it.
Is true that their profits are high a large chunk of their profits are going back to the parent company in in Korea and they’re not being used to grow the business locally in India if you look at this chart Hyundai’s parent company Hyundai Motor cop they were earning a royalty of 2.5% of the total revenue of Hundai from India but just a week before.
The IPO this royalty was increased from 2.5% to 3.5% now mind you this is not 3.5% of the profit it is 3.5% of the revenue and considering the fact that the Pat of the company 7.66 a 3.5% royalty from the revenue is a very very big deal now this is not to say that the parent company has no right.
To take in royalties from the daughter company it’s just that from the investor standpoint when the company’s plans are functioning at full capacity it is important that the company allocates a large chunk of money for capex investment in India so if the same Trend continues whereby the companies just giving out cash this superpower that.
Hyundai India has acquired over the past 28 years that may not be put to best use to dominate the Indian market and that for the investor may not be the best thing in the next 10 years but at the same time if the company invests enough in India and then takes back the rest to South Korea there is no issue for Hundai in India at all this was the story of.
Rise strength and weakness of Hundai India in 2024 and I just hope you learn something valuable from this case study that’s all from my side for today guys if you learn something valuable please make sure to hit the like button in order to make you buba happy and for more such insightful business and political case studies.
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