Hyundai’s IPO Bummer

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Good morning. In today’s edition: What could South Korean automaker Hyundai Motor have been thinking before pricing its initial public offer (IPO)?; the rise of industrial robots; and the Reserve Bank of India’s (RBI’s) NBFC clamp down. 

THE TAKE

Why Hyundai’s Mega IPO Has Flopped

By present standards of retail investor dynamics, Hyundai Motor’s mega Rs 28,000 crore was a flop. The retail investor part is important because while the issue as a whole was oversubscribed 2.37 times and thus sailed through, it was institutional investors who flexed their muscles.

Importantly, the retail section was only 50% subscribed while the non-institutional investor segment saw a 60% response. It would be safe to say looking at the overall auto market conditions right now, where cars are not exactly flying off showroom shelves and the flattish mood in the stock markets, the Hyundai stock will either list flat or drop after listing.

It would be a near miracle if it starts climbing after listing, at least in the short term. There was some trepidation around this listing, largely because of sentiments. First, on the fundamental side, the financials were seen as strong, the track record sound and a clear recognition that this was a strong number two player in India’s passenger vehicle market battling it out with the number one, the Koreans versus the Japanese Maruti Suzuki. But when it comes to sentiment, big IPOs are usually a sign of a market peaking out even if there is no direct correlation.

The bigger factor is the perception of listing gains. A study by regulator Securities and Exchange Board of India last month said that 54% of IPO shares in value terms were sold within a week by non-anchor investors. This study was based on data from 144 mainboard IPOs between April 2021 and December 2023.

Individual investors sold 67.6% of shares by value allotted to them within a week when returns were more than 20% and sold 23.3% of shares by value when returns were negative, the study said. Most investors who punt on IPOs are comfortable placing their bets when the issues are priced in the sub-Rs 400 range per share..

This applies to some extent to the secondary market as well, being one reason why small caps and mid caps have seen such huge flare-ups in the last couple of years. A price of Rs 1,960 per share or thereabouts is a deterrent to most such investors who may not be willing to cobble together funds if they don’t see a listing pop. And more likely would not thus venture to even buy a higher priced offer. Not surprisingly, they gave it a pass.

Possibly, Hyundai could have priced the offer lower, going against the advice of its investment bankers. The competition for Hyundai is with Maruti Suzuki, the number one player, and it thus priced the stock aggressively. Hyundai’s cars have always been well-priced for value-conscious Indian customers. Starting from Santro in 1998, which also explains the Korean giant’s success in the Indian market. Possibly Hyundai forgot to take a leaf from its own book when it came to pricing this IPO.

JANUS VIEW

Industrial Robots Are On The Rise And China Has A Lot Of Them

Among the most significant developments of the week was the retrieval by SpaceX, Elon Musk’s space venture, of its Starship’s first-stage booster rocket, the Super Heavy. This could be achieved with the help of robotics. The increasing versatility and sophistication of industrial robots, when combined with near-instant communications (low-latency, in the jargon) and artificial intelligence, will make all the talk of a fourth industrial revolution realise actuality. 

Robotics is also becoming increasingly prevalent for industrial use, and guess who has the biggest deployment of industrial robots? China! The country accounted for more than half of all fresh industrial robot deployments in 2023.

What this means is that the rise in wages and the exchange rate of the renminbi will be offset by a steady rise in industrial productivity. Any fear (fond hope) that China would, thanks to its declining population, run out of workers is wholly misplaced.

DECODE THE NEWS

Fintech Giants Navi, DMI Finance Face RBI Lending Shutdown

What? 

The RBI has ordered four non-bank financial companies (NBFCs), including Navi Finserv, an online lender, and DMI Finance, which owns the online lending platform ZestMoney, to halt lending operations effective October 21, 2024, citing concerns over excessive interest rates and predatory lending practice. The other NBFCs named in RBI's directive are Asirvad Micro Finance Limited and Arohan Financial Services Limited.

Navi Finserv, founded by Flipkart co-founder Sachin Bansal, and DMI Finance are major players in the online app lending space. 

This isn't Navi's first setback; in 2022, the RBI rejected its application for a universal banking licence, stating that the company's subsidiary was unsuitable. Navi had also aimed to go public with a Rs 3,350-crore IPO. However, despite obtaining SEBI approval in 2022, the IPO did not proceed.

Apart from this, DMI Finance, also named in the RBI's directive, had acquired the struggling fintech firm ZestMoney in a fire sale in January 2024. ZestMoney, once valued at $440 million, faced difficulties due to poor loan recovery practices. DMI Finance ultimately acquired ZestMoney for an undisclosed amount, likely far lower than its peak valuation.

Why Now? 

The RBI's action stems from "material supervisory concerns" regarding the companies' pricing policies, specifically their Weighted Average Lending Rate and interest spread. These were found to be excessive and violated regulations of unsecured and microfinance loans.

In addition to predatory pricing, the RBI found these NBFCs non-compliant with guidelines on income assessment, loan repayment obligations, and income recognition. Deviations were also noted in loan evergreening, gold loan portfolio conduct, disclosure requirements, and outsourcing practices.

What’s Next

The RBI’s order puts both Navi and DMI Finance and other NBFCs in a tough spot. They can’t lend money anymore and need to fix things to get back on track.

The RBI wants to make sure these lenders are treating borrowers fairly, especially those taking out small unsecured loans. The central bank also found that these NBFCs weren't following guidelines on things like checking borrower income and managing loan repayments. They need to fix these issues to show they can be trusted.

The RBI has said that it will reconsider the restrictions if Navi and DMI can show they've made the necessary changes. But it won't be easy.  Investors might get nervous, and other lending companies might take their customers.

FROM THE PERIPHERY

—🧑‍💻 Weeks after a young chartered accountant’s death raised concerns about the toxic work culture at EY's Pune office, another multinational is under fire. BJP MP Praveen Patel has urged Maharashtra’s labour department to investigate complaints against Piaggio’s Indian arm. As per The Economic Times report, Patel’s letter to Vinita Ved Singal, the labour secretary, claims mid- and senior-level employees at Piaggio Vehicles Pvt Ltd (PVPL) face workplace toxicity. He highlighted the case of Dhiraj Tripathi, a terminated executive from his constituency, alleging harassment through false police complaints. 

—🤑 Quick-commerce startup Zepto is reportedly seeking a new funding round of $100-$150 million from Indian family offices and high-net-worth individuals. Motilal Oswal's private investment office is said to be investing $40 million. This news comes as Zepto is reportedly preparing for an IPO in India. Founded in April 2021, Zepto has rapidly gained ground in the competitive quick-commerce market, capturing a 22% market share as of January 2024. Zepto's latest fundraising efforts, totalling over $1.2 billion in the last year, underscore the growing interest in the quick-commerce sector. Despite facing stiff competition from rivals like Swiggy's Instamart and Zomato's Blinkit, Zepto has managed to carve out a significant presence in the market.

CORE INBOX

Editor’s note: This has been lightly edited for better readability. 

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