Hyundai Motor's parent to fetch 196x returns from India's biggest IPO

Hyundai Motor India launched India's biggest IPO of Rs 27,856 crore on Tuesday, October 15, which will conclude for bidding on Thursday, October 17. The mammoth issue is entirely an offer-for-sale (OFS) of 14,21,94,700 equity shares by its parent Hyundai Motor Company.

Interestingly, the South Korean parent entity is minting piles of cash for its investment done in India's second largest passenger vehicle maker over the two decades. According to data from RHP, Hyundai Motor Company will be making astounding profits of 196 times or 19,500 per cent for their investment in the company.

The RHP of Hyundai Motor India states that the weighted average cost of acquisition per equity shares (WACA) for its promoter selling shareholder Hyundai Motor Company was Rs 10 apiece. It implies that the parent is making a profit of 196 times, or 19,500 per cent, at the upper end of the price band, which is fixed in the range of Rs 1,865-1,960 per share.

The weighted average cost of acquisition of equity measures the cost of equity proportionally for a company rather than simply averaging the overall figures during the given period. With the weighted average cost of equity, the cost of a particular equity type is multiplied by the percentage of the capital structure it represents.

Hyundai Motor India was incorporated in 1996. The South Korean parent entity is currently offloading 17.5 per cent stake, which leaves room for another 7.5 per cent stake sale in the company with a span of three years to meet the minimum public shareholders criteria of Sebi for Indian listed entities.

Brokerages mostly have a positive view on the issue and suggest subscribing for a long-term citing its sound financial record, strong brand recall, expansion plans, firm market share and focus on premiumization of the products. However, aggressive pricing, depleting cash reserves, large issue size, potential stake sale in future and complete offer for sale nature go against it.

After the initial carnage, the grey market premium (GMP) for Hyundai Motor India has seen a decent recovery. Last heard, the company was commanding a premium of Rs 60-65 in the unofficial market, suggesting a listing pop of merely 3 per cent for the investors. The GMP stood at Rs 45 a day ago.

Allotment rules simplified
The allotment in an IPO is managed by the registrar of the company and depends on the number of shares offered and valid bids received at or above the cut-off price. If one category is under-subscribed, it may be adjusted with oversubscription from another category.

However, any unsubscribed shares in the qualified institutional buyers (QIB) category cannot be used for other categories. Doe the consistently profitable company, about 50 per cent of shares are allotted to QIBs, 35 per cent are reserved for retail investors, and 15per cent allocation go the non-institutional investors. For any IPO to get successful or to be considered to sail through, it must receive a minimum of 90 per cent of bidding.

In an IPO, it is ensured that most possible investors do get allotment. This ensures that the retail investors get at least one lot. In case of under subscription, all investors get full allotment. On the other hand, a computerized lottery system allots a maximum of a single lot to investors in the case of oversubscription. There are chances that some investors may not get allotment.

NII category is divided into two parts, where small NIIs make between Rs 2-10 lakh range, while big NIIs application size above Rs 10 lakh. One third of NIIs portion is reserved for small NIIs and remaining two-third go to the bigger ones. Any leftover shares in the NII category may be used to meet excess demand in other categories.

If the NII category is undersubscribed, all investors get a full allotment. In case of oversubscription, each NII investor will be allotted one lot at least, based on the minimum application size. If shares remain after this, they will be allocated on a pro-rata basis to the investors.