Prime Stock Recommendation – A resilient automaker ready to accelerate

1. 

   sarosiva

   April 15, 2025 at 8:47 am

   Thanks for the recommendation. I have a couple of queries

   1. How much money flows out from the company by way IP like licence fee for usage of patents, brand name, etc?
   2. How much of the Indian company’s raw materials / components are sourced from the parent / group companies?

   I am raising these queries because these are the possible avenues through which foreign (parent) companies skim the Indian operations and avoid sharing profits with local shareholders . Thanks

   Sivakumar
   1. 

      N V Chandrachoodamani

      April 15, 2025 at 9:21 am

      Welcome your query sir,

      It is known that they have hiked Royalty from 2.5% to 3.5% of sales/revenue at the time of IPO. This was also being done as the Co. is moving form 100% owned to eventually 75% owned pursuant to IPO

      Having said, why stocks like Maruti and Hyundai has done well in India on financial performance is because this Royalty is paid on sales/revenue (or only when a vehicle is sold). So, they showed very high predictability in financial performance as they didn’t end up with lumpy R&D costs and impairments/write-offs on product failures

      These characteristics are going to stay as such; which in turn means predictable financial performance like consumer Cos. That’s the primary reason to take it forward for “buy” call.

      Hyundai India has not even diluted its share capital ever since it began operations in India. All its growth was funded by internal accruals only.

      Coming to sourcing of raw materials/components, Hyundai has an umbrella Co. Hyundai Mobis through which it sources bulk of its components. This related party transaction is also disclosed at the time of IPO

      Recently, proxy advisory firms have also come out with divergent views on Hyundai’s related party transactions.

      https://www.moneycontrol.com/news/business/markets/hyundai-motor-india-related-party-transactions-proxy-advisor-ses-advises-against-six-of-7-proposals-iias-and-ingovern-clear-all-12960402.html

      We also need to understand that the auto industry works with concentrated supplier base and with confidentiality as well. So, it is more or less related to that.

      Meanwhile, there are also transactions between Hyundai and Kia and they are nothing different from what is happening between Maruti and Toyota now where Maruti has offered its top selling models to Toyota in lieu of Toyota sharing Hybrid and EV technologies

      Furthermore, I have recently responded to another subscriber query two days before on this related party transactions in detail. Request to kindly refer to that as well; link below

      To summarize, your concerns are very much valid. But a lot of it also have to do with how the auto industry itself operates.
      We believe that the financial performance of the Co. will continue to be good and it could be hurt more by growth, market share, steel price movement, etc kind of factors rather than any negative surprise emanating from related party transactions

      Hope this clarifies

      Thank you
      1. 

         sarosiva

         April 16, 2025 at 10:40 am

         Thank you for the clarification.
2. 

   Vijay P

   April 9, 2025 at 12:55 pm

   Hi Chandra,

   Thanks for the article.
   I could see one RISK is promotor offloading (Promoter Holding: 82.50%). As per SEBI norms it is limited to 75% only.

   Thanks,
   Vijay
   1. 

      N V Chandrachoodamani

      April 9, 2025 at 1:55 pm

      Welcome your query sir,

      You are right that the Promoter stake is 82.5%. But they have 3 years to bring it down to 75%

      Meanwhile, the stock has now entered Nifty Next 50 and if it does well, should be part of Nifty 50 as well in 3 Years.
      Even if that doesn’t happen, there is actually no risk w.r.t absorption of 7.5% promoter share sale by the market.

      Hope this clarifies

      Thank you
3. 

   kishore.marodia

   April 8, 2025 at 10:22 am

   Hello Sir

   Appreciate your timely calls, have been pretty helpful so far

   With a global recession lurking, what would be your overall perspective on CONSUMER DISCRETIONARY as a sector, counting AUTO also in that bucket. If US, EU go into recession, we would be certainly impacted. Is this call taking cognizant of this view, or it is a standalone view of the company based on MICRO

   Regardless would love a post from PRIME INVESTOR team on this broader topic.

   Thanks
   Km
   1. 

      N V Chandrachoodamani

      April 8, 2025 at 11:00 am

      Welcome your query sir,

      In short, our discretionary consumption story strictly should trace to our own income growth and consumption growth.

      But this has been quite tricky post Covid with pent-up demand for goods and services kicking-in at different points of time (2021-2022 it was goods & 2023-2024, it was services) and playing deceptive for analysts and investors to make estimates of earnings growth

      In addition to that, consumer goods Cos also found themselves in a tough spot post Covid as it took time for them to pass input cost impact to consumers.

      So, what plays spoil spot can be two – either demand or input cost impact on margins when demand is not robust

      At this point of time, domestic demand slowdown is more worrisome for discretionary consumption Cos than the spill-over effect of a global recession.

      When it comes to Autos, the exporters (mainly Bajaj & TVS in 2W & 3W) may take some hit due to spill-over effect of a global recession. The impact on Maruti and Hyundai may be less as exports are a lower share of domestic volume Vs the 2W players

      If the much-awaited rural recovery picks-up and small car/micro SUV demand comes back, then these Cos maynot see any impact of global recession.

      But this will be at the opposite end for Tata Motors as 70% of its consolidated revenues (JLR) comes from UK, EU, US and China
      Market is rightly discounting it as it can be seen from stock price reactions as well

      As shared to previous query on Hyundai, both Hyundai and Maruti share some distinct characteristics Vs other auto makers and that makes their financial performance and cash flows more predictable; macro reason

      Hope this clarifies

      Thank you
      1. 

         kishore.marodia

         April 8, 2025 at 11:04 am

         Thank you sir
4. 

   NS Balaji

   April 8, 2025 at 9:52 am

   Thank you for the update. How do you compare this with Tata Motors which is trading at still lower PE?
   1. 

      N V Chandrachoodamani

      April 8, 2025 at 10:05 am

      Welcome your query sir,

      Hyundai and Maruti share some distinct characteristics Vs other auto makers – Both are cash machines as they don’t spend on R&D and rather pay royalty on sales. So, they don’t have lumpy R&D expenses or debt and in turn don’t face any write-offs/impairment

      Consequently, their financial profile is largely that of consumer companies and have more predictability

      Compare this with Tata Motors that has to do lumpy R&D expenditure, dealing with product failures, impairment write-offs and even more tough job at the Jaguar part of JLR. Whatever they pumped in till date in Jaguar part of JLR has not yielded anything at all. Thanks to Land Rover brand that is still keeping JLR afloat

      This makes it an extremely difficult stock to analyze as well. If you rely on debt reduction plan, then it is obvious that it will have to again load up with debt sometime later to catch up with competition

      It is for this same reason that Hyundai’s parent is fetching far lower valuation in Korea than the Hyundai India

      Ultimately, stock prices are a slave of earnings (in turn means earnings converted to cashflows also) and companies exhibiting this gets better valuation

      Where cash flows are unpredictable, valuations can swing wildly during good and bad times.
      Tata Motors’ recent rally itself was just aligned with global rally in auto stocks rather than nothing special from the Co. itself. The demerger news also added to fire, that’s all

      Otherwise, it is an extremely difficult stock to analyze

      Hope this clarifies

      Thank you

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