Hyundai's upcoming initial public offering in India could be a breakthrough listing for the country’s capital markets. The South Korean automaker stands to raise up to US$3 billion by offering a 17.5% stake in its Indian subsidiary.

The listing will offer Indian investors access to a top-tier global car manufacturer with a deep product portfolio that includes a wide range of hatchbacks, saloons and sport utility vehicles as well as a growing stable of electric and hybrid vehicles.

Aside from the gravity and global status of the company, this IPO could also breathe new life into India's stock market ecosystem while boosting professional service providers such as brokerages and law firms in the country.

Hyundai’s move could further stimulate India’s ambitions for capital account convertibility, potentially positioning the country as a hub for capital allocation from both domestic and international sources.

But that might also be wishful thinking as competition from global financial capitals like London and New York as well as established Asian financial hubs will not wane, at least in the short to medium term.

Strong economic momentum

 What makes the Hyundai IPO worthy of note, though, is the timing. As wealth grows in the world’s most populous nation, where 43.3% of its population is under the age of 25, Indian investors are increasingly happy to add equities to their traditional saving schemes.

The stock exchange has reached new highs recently, with related capital gains supporting discretionary consumption. Projections from the Organization for Economic Co-operation and Development (OECD) put India’s GDP growth at 7.8% for 2023-24 and around 6.5% for each of the following two fiscal years.

With efficient trade settlement, robust regulatory frameworks, and leading digital infrastructure, the country’s financial set-up is strong.

However, a major shift to India by global corporations keen to diversify their supply chains away from China, although widely expected, is yet to seriously emerge.

James Cook, head of investment specialists at Federated Hermes, points out that Hyundai's IPO decision builds on the traction the Korean group has so far gained in India with a 13% market share and underscores its commitment to an attractive, underpenetrated growth market.

“Given Covid and rising geopolitical tensions between Beijing and Washington, many multinationals are looking to India as an important destination to diversify supply chains away from China,” says Cook. “Foxconn, the Taiwan-based tech giant recognized for assembling around 70% of global iPhones and the largest contract manufacturer globally, is investing US$2.7 billion to build a 300-acre manufacturing and production of equipment and devices plant close to Bengaluru airport in Karnataka state. This strategic move by Apple's key partner reflects an accelerated effort to establish a robust supply chain in India.”

Daniel Tan, portfolio manager at Singapore-based Grasshopper Asset Management, adds: “The economic stability from Narendra Modi’s third term would further reinforce domestic macro fundamentals which has been the source of outperformance against other emerging market peers in recent years.  A patchy recovery in China and bigger equity deals would also enhance India’s chance of attracting global funds as investors find investment alternatives to China.”

Abundant domestic liquidity

Considering India’s current economic situation and its powerful draw for numerous industries such as renewable energy firms and electric vehicle makers, could Hyundai’s move stimulate other multinationals to look at listing in India?

Nicola Yeomans, co-head of private capital at law firm King & Wood Mallesons in Singapore, says: “In the current world of closed IPO markets, the Indian capital market continues to be a bright spot. Private capital exits have been available, which is a key reason for the performance of India-specific [private equity] returns over the last couple of years. India certainly makes sense for regional issuers as a location for future listings, given the strong local institutional market. However, the trend will be limited to Asia-focused, Asia-headquartered businesses.”

Joanne Goh, senior investment strategist at Singapore’s DBS Bank, notes: “We believe that the significant valuation premium in the Indian market is driving foreign companies to seek listings in India. These companies are also keen to tap into India's abundant domestic liquidity. However, it remains uncertain whether local investors have an appetite for foreign stocks, given their preference for familiar investments and the strong return expectations offered by the Indian market.

“To put this into perspective, the Korean market trades at an average price-to-earnings (PE) ratio of 10x compared to India's 23x. Over the past three years, India's Sensex has delivered an annualized return of 14.5%, significantly outperforming the US S&P 500, which returned 8.9%.

“We think a listing by a subsidiary formed by a partnership with a local company makes more sense to capture the PE premium, which can help enhance the valuation of the parent company,” adds Goh.

Local funding focus

Speaking from India, Pramod Kumar, chief executive officer and head of investment banking at Barclays India, offers a pragmatic view. “You wouldn’t typically find multinational companies list in multiple geographies in normal course as they manage their long-term funding, particularly equity capital, in their home markets and fund their subsidiaries or [joint-venture] operations from there. These are more exceptions either due to regulatory reasons or some other commercial objectives. In India there are several listed multinational companies, but they are more a consequence of historical reasons when it was mandated to list,” he says.

“Having said that, it is very interesting to note that for several multinational companies, listed Indian subsidiaries such as Hindustan Unilever, Siemens and so on, are today so valuable that they contribute a lot to the valuation of the parent since the Indian subsidiaries trade at significantly higher multiples than the parent.

“Examples like the Hyundai Indian IPO may trigger some other multinationals to think on the same lines, but I don’t see a lot of such cases as managing local listing obligations, governance and compliances in multiple jurisdictions is not viewed as very favourable,” Kumar adds.

Strong fundamentals

If Hyundai's IPO proceeds and succeeds, it will certainly call attention to India's attractiveness as a venue for global capital raising, and could lead to a new era of financial integration and opportunity in the country.

While India’s robust economic growth, along and the continued expansion of its middle class, is not guaranteed, it is likely to happen, and like everything else in the country, it is going to be of substantial size. 

According to a 2023 report by the People Research on India’s Consumer Economy (PRICE) and India’s Citizen Environment, a not-for-profit think tank, the size of India’s middle class will nearly double to 61% of its total population by 2047, from 31% in 2020-21.

Continuing political stability and economic reforms, coupled with a sustained annual growth rate of between 6% and 7% over the next two and half decades, will make the country one of the world’s largest markets.

On the back of its growing financial heft, could India eventually become a rival to Hong Kong, Singapore or Tokyo for future IPOs?

“India has deeper liquidity in the equity capital markets than Singapore and this has been the case for some time,” says King and Wood Mallesons’ Yeomans. “The exception is Singapore [real estate investment trusts], which are a specific product and well supported by Singapore and international institutional investors. Hong Kong is a different story and has historically been an excellent venue for global listings, whether in the form of dual listings or otherwise. However, this activity has fallen to a minimum in recent times and the question is whether international issuers will continue to choose [Hong Kong] as their first-choice venue going forward.”.

“It will continue to be a key listing venue for businesses with strong [China] presence and Shanghai exchange would also be an alternative. There is a great opportunity for India [as well as Australia] to present itself as a listing venue that can meet the needs of global issuers. I think dual listings will become the structure of choice for larger transactions, to provide more liquidity flexibility for global and [Asia-Pacific] investors alike,” she adds.

More mega offerings needed

But Grasshopper’s Tan notes: “Although around US$3.9 billion has been raised in India via IPOs so far this year, more than double the same period in 2023 and higher than the amount raised in Hong Kong, the breadth of the India market, in terms of market participants, is still relatively smaller than at least the Hong Kong market.

“It is still early to say if India can eventually become a rival to Hong Kong, Singapore or other Asian hubs such as South Korea and Japan, as the equity capital market in India would need to see more large-size equity offering deals such as Hyundai Motor over an extended period to match up to other Asian hubs.”

Barclays’ Kumar, who sees first-hand the Indian investment story unfolding on a daily basis, remains optimistic about India’s potential as a global IPO venue. “I don’t think many Indian companies ever considered Hong Kong or Singapore as possible listing venues; US or UK earlier, definitely yes,” he says. “With Indian valuations and strength of Indian equity markets, I definitely see more Indian companies/businesses giving up their plans to list their operations in the US in favour of India, and we are already seeing that many companies have ‘inverted’ their structures to allow Indian listing as an alternative to US listing.”