CNBC's Inside India newsletter: A potential misstep in the IPO process?

This report is from the CNBC "Inside India" newsletter, which provides timely and insightful news and market commentary on the emerging powerhouse and the big businesses driving its rapid growth. If you find it interesting, you can subscribe here.

The big story

The Indian subsidiary of a carmaker began trading this week with much anticipation, but its shares dropped by about 7% on their debut.

Despite reducing its losses, the stock remains 5% below its initial public offering price.

In 1996, the Korean car giant, the world's third-largest passenger vehicle maker by volume, established its presence in India following the country's economic reforms. Now, 28 years later, the company has secured its largest payday by selling a 17.5% stake and raising $3.3 billion from the stock market.

India's second-largest automaker has shown its understanding of the market by customizing its globally renowned and technologically advanced vehicles to suit Indian consumers' preferences and road conditions.

Hyundai's management believes that the enterprise is profitable and the trend will continue.

Although Hyundai has achieved success, it seems that the stock market has ignored it this week.

Despite a 5% decline in the index over the past month, shares have fallen across the board. However, investors have identified several factors that may have caused the immediate downturn.

The proceeds from Hyundai's Korean parent's stock market listing are being returned to the parent company, rather than being used for growth or debt repayment as is typical in an IPO. Investors are concerned that the Indian subsidiary may not benefit from the cash raised on the stock market, and the Korean parent has not disclosed how they plan to use the proceeds from the share sale.

It seems that Hyundai does not require immediate funding and is simply taking advantage of the "frothy" market conditions in India.

Gaurav Narain, principal advisor at the ICG fund listed on the London Stock Exchange, stated that the company did not require money, and the parent's attempt to take advantage of the valuation was the real issue. The ICG fund primarily invests in Indian small and mid-cap stocks and did not participate in the IPO.

Kunjal Gala, the head of global emerging markets and lead portfolio manager of the $3.3 billion Federated Hermes Global Emerging Markets Equity Fund, speculated that the decision to list the Indian subsidiary was driven by a need for "better valuation for their parent company in Korea."

This is one way of financially engineering a better valuation, right?

Nearly half of the market capitalization of the Korean parent is now held by the Indian subsidiary.

Hyundai has increased the royalty fees it charges its Indian subsidiary from a per-model basis to a flat 3.5% of total revenue in order to compensate for any loss of future income from its share sale.

Financial services company Emkay's equity analysts have initiated stock coverage with a "sell" rating, stating that reduced earnings potential is expected due to the higher royalty payment, which is likely to limit earnings per share growth.

"What most retail investors desire is a significant discount," Narain stated.

Those who are not investing in one of India's top automakers may be missing out on long-term profits, according to some.

According to Nomura's analyst Kapil Singh, Hyundai Motor India is a suitable proxy to capitalize on the increasing premiumization trend in the Indian car market, as stated in a note to clients on Oct. 22.

Customers are becoming more aspirational and are willing to pay more for attractive designs and high-tech features. Singh predicts that the stock will increase by approximately 32% from its current value of 2,472 Indian rupees ($29.40) to a new high of 3,288 Indian rupees ($41.76) by Thursday's close.

Macquarie analysts concur that Hyundai is best positioned to seize the evolving Indian middle class and affluent market.

The investment bank believes that Hyundai India, due to its parent's proficiency in producing advanced hybrid and electric vehicles for Korean and Western markets, will be the ideal choice for Indian consumers when the time comes for the EV shift in India.

Macquarie's analysts, Ashish Jain and Pratik, stated that they believe the company's strong parent company prepares it well to address India's evolving powertrain mix better than domestic peers. They initiated coverage of the stock with an "Outperform" rating and a price target of 2,235 rupees, indicating about 20% upside.

Need to know

Narendra Modi, the Indian Prime Minister, and Xi Jinping, the Chinese President, met for the first time in five years at the BRICS summit in Russia. During their meeting, they agreed to enhance cooperation and resolve conflicts between their countries. Modi emphasized the importance of mutual trust, respect, and sensitivity in their relationship. Their conversation took place after India and China reached an agreement on Monday to resolve a border dispute.

An agreement has been reached between India and China to end their military stand-off at their borders. Since 2020, military troops from both countries have clashed with each other in the western Himalayas. According to Indian Foreign Minister Subrahmanyam Jaishankar, with this deal, the situation has been restored to its 2020 state, and the disengagement process with China has been completed.

The All India Consumer Products Distributors Federation, representing around 40,000 fast-moving consumer goods companies, has requested an antitrust investigation into Zomato's Blinkit, Swiggy, and Zepto for alleged predatory pricing. These companies offer quick commerce, which delivers purchases to consumers within 10 minutes.

Nvidia has strengthened its presence in India by forming partnerships with local companies and launching a Hindi language model. CEO Jensen Huang spoke at the company's AI summit in Mumbai, which was attended by Bollywood superstar Akshay Kumar and India's richest person, Mukesh Ambani.

What happened in the markets?

The Indian stock market has experienced a decline, with the index falling nearly 2% over the past week and more than 6% over the past month. Despite this, the index has still risen 12% this year.

The Indian government bond yield has risen slightly to 6.82% over the past week.

Puneet Gupta, director at S&P Global Mobility, advised investors not to make hasty judgments about the decline in Hyundai Motor India's shares on its first trading day. Despite the drop, institutional investors have shown "heavy interest" in the company, indicating its mid-term and long-term potential.

Vinit Sambre, Head of Equities at DSP Asset Managers, stated that while it may be wise for foreign investors to take profits from the recent surge in the Indian market and invest in markets with short-term opportunities, India is a long-term structural market that is ideal for investors seeking to generate returns and view growth as a fundamental.

What's happening next week?

On October 28, shares of Deepak Builders & Engineers India and Waaree Energies will begin trading. Meanwhile, on October 31, the U.S. inflation data, India infrastructure output, and China PMI will be released.

The flash PMI for manufacturing in India and the U.S. S&P Global Composite PMI Flash for October have been released.

October 28: Deepak Builders & Engineers India IPO, Waaree Energies IPO

October 29: The US JOLTs job openings and the Saudi Future Investment Initiative Institute summit commence.

October 30: U.S. GDP, U.K. Budget

The India infrastructure output, U.S. personal consumption price index for September, and China NBS Manufacturing and Non-Manufacturing PMI for October are important economic indicators.

November 1: China Caixin Manufacturing PMI