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Good morning. In today’s edition: Should we bet on the Hyundai initial public offering (IPO)?;  India’s small town hotel boom and what L&T’s underwhelming performance could mean.

THE TAKE

Hyundai IPO: To Buy Or Not To Buy?

When South Korean automaker Hyundai launched its first small car, the Santro, 26 years ago, people would joke about the ‘tall boy’ shape of the car. The car looked unusual or even bizarre for those times. Hyundai’s IPO that opens on Tuesday, however, is no joke or something unusual. Just that the size and time could be a little worrisome.

Hyundai Motor India is launching a roughly Rs 28,000 crore IPO on October 15, the largest ever in India’s history. The price band is Rs 1,865-1,960 per share and will cross the record set by LIC's initial share sale of Rs 21,000 crore.

Hyundai’s IPO is a first for other reasons as well. It’s the first car company to go for an IPO after Maruti Suzuki in 2003. It's also a multinational listing in the domestic market and there have not been too many in recent decades. That is a good sign of faith in domestic markets, both the consumer as well as investor. Not all MNCs go down this twin route. And of course it is an IPO from the East, most listed subsidiaries of MNCs in India hail from Europe or North America.

However, there are concerns regarding the IPO. Large IPOs can suck out more liquidity than there is and kill appetite for some time. They have often also coincided with market peaks, even though there may not have been a direct correlation. Then there is the price, which is quite tightly valued according to analysts. This means there is not much upside. The money that will be raised will go to the parent company and not to Hyundai Motor India.

A report in The Economic Times said that of the six mega IPOs, worth at least Rs 10,000 crore seen on Dalal Street so far, five have negative returns on listing.  Not just that, IPO investors who have held on to the stock in hopes of a turnaround are still sitting on losses, according to data from Prime Database.

The rogues gallery includes companies like PayTM and New India Assurance among others. The one IPO that has continued to do well is Coal India. The only message I can take away from that is the bigger fortune under the ground than over it. Not to mention that it’s a bonus if it is government-owned. But then Hyundai’s vehicles ply above ground.

On the flip side, this is no tech company deep in losses, selling a future dream. Rather, it’s a tested product firm that has been selling cars in India for close to three decades and exporting them from its world-class factories in Tamil Nadu. The financials are strong with sales of close to Rs 70,000 crore last year with profits of Rs 6,000 crore.

Hyundai’s margins and price-to-earnings at this point run close to Maruti, so you can see where and how it is pitched — Koreans versus the Japanese on Indian soil. Hyundai’s margins are a little better because most of its portfolio is the higher margin SUVs.

Abhishek Gaoshinde, an analyst I spoke to from Sharekhan by BNP Paribas said the Hyundai IPO is an opportunity to buy an MNC and a passenger vehicle stock given that Maruti Suzuki is the only pure-play car stock — Mahindra and Mahindra and Tata's financials also reflect their tractor and commercial vehicle businesses. He also argues that Hyundai India does not need any money as such because it is generating healthy cash so the funds going to the parent is not really an issue.

The arguments for and against seem evenly matched though the ones for are based more on fundamentals while those against are more on sentiment. It will be interesting to see what scores in the next few days. Maybe Hyundai will deliver another Santro, something people laugh at in the beginning but then embrace over time.

DECODE THE NEWS

Hotel Boom In India’s Small Cities Won’t Sustain Unless Infrastructure Keeps Pace

Throughout the past year, and perhaps since the end of the pandemic, India’s tier 2 and tier 3 cities have seen a boom as hotels look to diversify their presence and look for greener pastures. At a time when the post-pandemic pent-up demand for consumption seems to be waning for various reasons, hotels in India seem to not be affected.  All signs point towards the continued growth in the hospitality sector in India, fuelled by Tier 2 and 3 cities. 

While experts warn that there could be market corrections if infrastructure growth doesn't keep up, hoteliers are optimistic that smaller cities, with lower real estate prices and other localised factors, will continue to drive profitability.

CO:RELATION

L&T’s Underwhelming Performance

Larsen & Toubro, the nation’s biggest engineering and construction company, shares rose 2% on Monday. However, the company’s share price registered an underwhelming performance in the stock market in 2024. L&T is considered a barometer for India’s capital expenditure-led growth. The sluggish performance in the company’s share price shows that the market is taking a dim view of the prospects ahead. That is despite the company announcing a significant build-up in orders from the Middle East and projected a significant order book jump for the fiscal 2024-25. 

With the first two quarters of 2024-25 not seeing an increase in the Indian government’s capital expenditure, the company relied on overseas orders to boost the order book that currently stands at over Rs 4.9 lakh crore. L&T projects the order book to go up to Rs 9 lakh crore at the end of March 2025. That is, assuming the government will kickstart fiscal expenditures. Prime Minister Narendra Modi made a surprise visit to the office of PM Gatishakti, the flagship infrastructure initiative that was completed in three years.

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CORE NUMBER

1.84%

This is the current rate of wholesale price index (WPI)-based inflation as of September, which increased slightly in comparison to 1.31% in August. This uptick was driven by a surge in food prices, which accelerated to 11.53% in September from 3.11% in August, as revealed by data from the Ministry of Commerce and Industry.  Contributing to this rise were substantial price increases for onions (78.8%), vegetables (48.7%), and potatoes (78.1%), Business Standard reported. However,  the data also indicated a deceleration in the prices of manufactured products and further reductions in fuel and power costs.

FROM THE PERIPHERY

—🚙 Passenger vehicle (PV) sales in India are projected to grow by less than 5% in FY25, a disappointing outlook for the automotive industry. SIAM data reveals a mere 0.53% year-on-year increase in domestic PV wholesales during the first half of FY25, reaching 2.081 million units. September saw a 1.4% decline in domestic PV sales, totalling 3,56,752 units. This sluggish growth can be attributed to several factors: waning pent-up demand from the pandemic era, inflationary pressures impacting consumer spending, and income growth failing to keep pace with rising car prices. In contrast, the two-wheeler segment showed robust growth, with domestic sales surging by 15.8% year-on-year in September, reaching 2.025 million units.

—🧑‍💼 Announced in this year’s budget, the Prime Minister's Internship Scheme has attracted over 155,000 registrations since its October launch. This government initiative aims to provide 10 million young people with 12-month internships at India's top 500 companies.  The government has finalised the participating companies and listed them on a dedicated web portal managed by the Ministry of Corporate Affairs. Over 80,000 internship opportunities are already available from companies like Jubilant Foodworks, Eicher Motors, and Larsen & Toubro, Mint reported on Monday. Interns will receive ₹4,500 per month from the government and ₹500 from the company, along with a ₹6,000 one-time grant.

—🖥️ Software engineers are facing a skills shift in the age of generative AI. A Gartner report published on Monday said that over 80% of software engineers may need to acquire new competencies like prompt engineering and retrieval-augmented generation to remain competitive. A Gartner report revealed that 56% of software engineers surveyed acknowledge the growing demand for AI/ML skills, but many lack these competencies. While AI coding tools promise increased productivity, their effectiveness is debated. Studies also show a decline in code quality and a GitHub survey indicated no productivity gains among 800 developers using Copilot, with a 41% rise in bugs..

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