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How Hyundai is Killing Maruti Suzuki in India? : Hyundai Business case study
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How Hyundai is Killing Maruti Suzuki in India? : Hyundai Business case study

Sep 20, 2024

Hi everybody! Hyundai is one of the most iconic companies to enter the Indian market, and it’s hard to believe that a South Korean brand, once difficult to pronounce, is now on the verge of launching the biggest IPO in India’s history. Indian stock markets could soon witness their largest IPO as Hyundai, the South Korean automaker, is preparing for a major milestone—going public in India. Hyundai’s IPO is poised to be one of the largest in recent times, possibly the biggest ever in India’s history, and the first for an automaker since Maruti Suzuki in 2003.

Back in 1996, when Hyundai entered the Indian market, Maruti was the dominant player, holding 60% of the market share, and essentially had a monopoly among the middle class. But despite the overwhelming presence of Maruti, Hyundai made its mark with models like the Santro, i10, i20, and Creta. It disrupted the Indian automobile sector to such an extent that today, Hyundai is the second-largest automaker in the country, boasting a profit of ₹4,653 crores. In terms of profitability, Hyundai has outpaced Maruti—while Hyundai earned ₹65,355 per vehicle in FY23, Maruti made only ₹4,939 per vehicle.

After 28 years of establishing a stronghold in the Indian market, Hyundai now plans to raise ₹25,000 crores with its IPO. Sounds fantastic, right? But there are some hidden risks that could jeopardize all the progress Hyundai has made in India. These risks are outlined in the 436-page DRHP (Draft Red Herring Prospectus) document Hyundai filed with SEBI. We sifted through all this data so you can sit back and enjoy the key insights from this massive document.

In today’s blog, we’ll explore how a South Korean company like Hyundai broke into the Indian automobile market, leaving behind giants like Tata and Mahindra. Despite being a foreign company, how did Hyundai achieve such high profitability and surpass a behemoth like Maruti in India? And most importantly, after such remarkable progress, what are the hidden risks that could potentially derail Hyundai’s growth in India?

Before we dive in, a quick disclaimer: I am not a SEBI-registered investment adviser, and this blog is not intended to provide investment advice. It is meant to educate you about the rise of Hyundai in India.

Hyundai’s Secret to Success in India

To understand Hyundai’s success, you need to look at its core philosophy. As we saw in our Boeing episode, no matter how much profitability or earnings per share a company achieves, if it strays from its core philosophy, those numbers can crumble. So, what is the secret recipe behind Hyundai’s success in India?

This story dates back to the early 1990s. At that time, India had very few car brands, such as Hindustan Ambassador, Premier Padmini, and Maruti 800. However, in 1991, India’s Finance Minister, Dr. Manmohan Singh, liberalized the Indian economy, opening the doors for foreign direct investment. This allowed foreign automobile companies to rush into India.

Most foreign companies focused on catering to the rich, selling premium cars like the Lancer, Opel Astra, and Ford Ecosport. However, Hyundai took a different approach. They identified key gaps in the market:

  1. Customer Treatment: The Indian automobile market did not respect customers. Customers were put on long waitlists, after-sale service was poor, and customer feedback was ignored.
  2. Design Suitability: Compact cars at that time didn’t address India-specific issues, such as accommodating people who wore turbans or managing the intense Indian heat with an efficient cooling system.
  3. Market Potential: In a 35 to 40°C atmosphere, cars were often damaged due to poor road conditions and monsoon seasons. Moreover, even the wealthy wanted multiple compact vehicles per household for convenience. While the sale of midsize vehicles barely touched 30,000 units, Hyundai realized that the compact vehicle segment had the potential to reach 60 to 80,000 units in annual sales.

Hyundai launched the iconic compact car for India, the Hyundai Santro. What’s unique about the Santro? It featured the most powerful Epsilon engine and computerized multipoint fuel injection, making it more fuel-efficient. The Santro was a complete value-for-money product for Indian consumers because Hyundai focused on the smallest details that no other car companies noticed. For instance, they increased the vehicle’s height to accommodate Indians who wore turbans, earning the Santro the nickname “tall boy model.” They also improved their air conditioning system to cool down the car even when the outside temperature was 35 to 40°C. Hyundai meticulously designed a model specific to the Indian consumer. To take it to another level, while most companies were manufacturing outside India, Hyundai set up a large-scale manufacturing plant in India itself. This move gave them two incredible advantages: low-cost production and the ability to produce cars at scale for the next 30 years. The Santro was not only a high-quality car with great features, but it was also cost-effective. Hyundai ensured they had dealerships not just in tier-1 cities but also in tier-2 and tier-3 cities. One of the most brilliant things Hyundai did was hire Shah Rukh Khan as their brand ambassador. By adopting a localization strategy, focusing on better services in tier-2 and tier-3 cities, customizing a car specifically for the Indian market, and connecting with the audience through Shah Rukh Khan, the Santro became a massive success in India. And they didn’t stop there.

Expanding Horizons: Hyundai’s Continued Growth

Hyundai went on to find another gap in the market in the early 2000s. At that time, the market mostly consisted of small hatchbacks like the Santro, Maruti Ritz, or Maruti Alto, and premium luxury cars like the Honda City or Audi A6. There was a gap for a mid-range product, similar to today’s smartphone market, where budget phones and high-end ones are available, but mid-range phones like OnePlus fill the gap. During the early 2000s, the middle-class Indians had only small hatchbacks like the Alto as an option, with no choice for an upgrade. This is where Hyundai saw an opportunity. In 2007, they launched the i10, followed by the i20 in 2008. They successfully launched both a mid-range and upper mid-range product, and not surprisingly, both cars were a huge hit. The i10 was priced between ₹3.5 to ₹6 lakh, while the i20 was between ₹4.2 to ₹8 lakh, offering premium features at reasonable prices. With multiple variants and vibrant colors, they provided cars that looked premium without being too expensive, much like the appeal of OnePlus in the smartphone market. Both the i10 and i20 became extremely popular in India.

In 2016, Hyundai took another leap with the Creta. Back then, only 10% of cars sold in India were SUVs, including models like the Innova, Safari, and Scorpio. But there were no mid-sized SUVs with a competitive price range of ₹8-9 lakh that offered premium features. Hyundai saw this gap and launched the Creta in 2016. The Creta combined space, premium interiors, and features without being as expensive as premium cars. This move paid off as the Creta became a best-seller, reaching 10 lakh sales in India by February 2024. Hyundai became the biggest mid-sized SUV seller in India with a 30% market share.

Hyundai’s success is based on a philosophy of thoroughly studying the market, identifying gaps, and offering value-for-money products that meet specific customer needs. The Santro disrupted Maruti, the i10 targeted Alto, and the Creta overshadowed models like the Duster, Scorpio, Safari, and Innova. Hyundai also provided exceptional after-sales service in tier-1, 2, and 3 cities. This philosophy has driven Hyundai’s growth from 1996 to 2024. Understanding this is key for investors who want to predict Hyundai’s next moves.

Financial Insights and Challenges

Now, let’s move on to the numbers. Looking at Hyundai’s EBITDA margins for the nine months ending in December 2023, Hyundai stood at 12.7%, while Maruti was at 13.3%, and Tata Motors at 6.1%. But how did Hyundai reach such high profitability? The first reason is their premiumization strategy.

Maruti and Hyundai operate with different business models: Maruti sells low-margin, high-volume products like hatchbacks, while Hyundai focuses on high-cost, high-margin vehicles such as SUVs. For instance, Hyundai India derives 66% of its domestic sales from SUVs, whereas Maruti obtains 70.5% of its volume solely from hatchbacks. Hyundai’s financial strength is further exemplified by its robust free cash flow, which is the money remaining after all expenses and taxes. To clarify the difference between free cash flow and profit after tax (PAT), let’s use a bakery as an example. Suppose the bakery earns a revenue of 5 lakh rupees. The operating expenses total 3 lakh rupees, and taxes amount to 50,000 rupees, resulting in a PAT of 1.5 lakh rupees. Free cash flow includes PAT minus capital expenditure and working capital. If the bakery’s capital expenditure is 1 lakh rupees and working capital is 50,000 rupees, the free cash flow will be zero. Free cash flow is essential for a company’s growth, as it’s used to expand the business, pay dividends, and reduce debt. Hyundai’s impressive free cash flow indicates the company’s financial health and its capacity for future growth. In FY23, Hyundai generated ₹19,591 crore in free cash flow, whereas Maruti’s free cash flow was ₹15,128 crore.

Despite these financial achievements, Hyundai faces challenges. The Indian automobile market is expected to grow at a compound annual growth rate of 6-7% from 2023 to 2028. To sustain this growth, Hyundai needs to diversify its product range and enter new segments. The company is already working on electric vehicles (EVs) and hybrid technology to cater to changing market demands. Additionally, the government’s push for electric vehicles and stricter emission norms are driving the industry towards sustainability. Hyundai’s commitment to innovation and sustainability will be crucial in maintaining its competitive edge in the evolving market.

Key Takeaways and Future Outlook

So, what should investors and industry watchers take away from Hyundai’s story? Hyundai’s rise in India exemplifies the importance of understanding market gaps, focusing on customer needs, and continuously innovating. The company’s success with models like the Santro, i10, i20, and Creta highlights its ability to adapt and excel in a competitive market.

Hyundai’s upcoming IPO represents a significant milestone for the Indian stock market and a testament to the company’s achievements in India. However, potential risks and market challenges must be carefully considered. As Hyundai continues to expand its product offerings and invest in new technologies, its ability to navigate these challenges will determine its future success.

For those interested in exploring investment opportunities or learning more about Hyundai’s market strategies, the IPO presents a unique chance to witness a significant event in India’s financial landscape. Keep an eye on Hyundai’s developments as they continue to shape the future of the Indian automobile industry.

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Source – How Hyundai is Killing Maruti Suzuki in India? : Hyundai Business case study

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