Hyundai’s India IPO Harks Back To Another Era

A comparison with the past may help shed a light on the future. Back then, issuers had to be coerced. India’s foreign-exchange position, never too comfortable, had started looking downright perilous after the 1973 global oil shock. Colgate’s dividend repatriation, many times more than its capital investment, became a lightning rod for lawmakers. They brought in a law to limit multinationals’ holdings in domestic operations to 40%.

Some global firms like International Business Machines Corp. and Coca-Cola Co. decided to pack up in response to the socialist turn in India’s politics. Others like Colgate, Unilever Plc and Cadbury Ltd. chose to stay. In the late 1970s, they sold shares at lowball prices laid down by the controller of capital issues, putting high-quality stocks within reach of what was still a tiny middle class. (1)

That investor base has grown by leaps and bounds; there are now more than 170 million accounts for holding electronic securities. At the same time, the balance-of-payment pressure has eased. India’s foreign-exchange coffers are brimming with nearly $700 billion in assets. Hyundai’s parent offered to sell as much as 17.5% of its local unit not because anyone twisted its arm. The Korean firm did it to take advantage of India’s sizzling valuations. Suzuki Motor Corp. is worth $20 billion on the Tokyo stock exchange. Its Indian unit, in which the Japanese automaker owns a little over 58%, has a market capitalization of $45 billion in Mumbai.

Hyundai’s compatriot LG Electronics Inc. is also reported to be preparing for a potential IPO of its Indian unit. Whirlpool Corp., the American home-appliances giant, has already offloaded 24% of its unit headquartered in Gurgaon, near New Delhi. “When you have a business trading at 50 times multiple when your own company trades a lot lower, it’s an asset arbitrage. But we believe in the long-term future growth of India,” Chief Executive Officer Marc Bitzer told CNBC in February.

Even Coca-Cola, which reentered the country in the 1990s, may be planning to list its local bottling plant, according to media reports. Walmart Inc. is yet to decide if it will sell shares in its Indian e-commerce platform and digital payments firm locally, though I think that’s what the retailer will ultimately do. If for no other reason than to “Indianise” enough so that it isn’t constantly at the service end of New Delhi’s policy stick against foreign-owned online marketplaces.

Politicians used a heavier baton in the 1970s to force multinationals’ hand. The now-repealed Foreign Exchange Regulation Act, or FERA, of 1973 was a draconian law, even though it had its unintended benefits. For instance, the local Unilever unit bargained hard for an exemption from the 40% shareholding limit for its Anglo-Dutch parent. Managers in London had sold 10% of Hindustan Lever, as it was then known, to the public in 1956, but they knew they had to do more to keep on hawking Lifebuoy soap and Surf washing powder to Indian consumers.

To demonstrate its good intentions, Unilever began exporting shoes, clothing and seafood from India — earning some foreign exchange. It also set up a factory to make chemicals for detergent. That unit, sold later to the Tata Group, is now a major hub for chemicals and fertilizers.

A paper by economic historians Michael Aldous and Tirthankar Roy details these and other strategies adopted by multinationals. India’s economy was subdued between 1965 and 1975, and then it mysteriously recovered. “The consequences of FERA in stimulating diversification and issue of fresh equity may have contributed to the recovery,” they wrote.  

Don’t rule out a similar invisible leg-up all over again. A more direct benefit, however, will be the same as what it was 50 years ago: a boost to the stock of quality paper. It’s an important cushion at a time when a frothy market is attracting weak issuers and fly-by-night operators. Intense selling by foreign investors in recent weeks has put the spotlight on lofty valuations amid weakening earnings growth. Even beyond the current mania, it will be good for Indian indexes to have a better mix of multinationals and family-owned firms.

Family-controlled enterprises account for 75% of India’s GDP. But while a few of them have created enormous shareholder value, many more have destroyed wealth with impunity. Multinationals, generally more conservative with their investments, do reward investors: Hindustan Unilever Ltd. paid out 96% of its last full-year profit. ITC Ltd., formerly Imperial Tobacco Co., distributed 84% of its earnings as dividends.  

The rise of India’s equity culture is usually attributed to the 1977 IPO of Reliance Textile Industries, a precursor to today’s Reliance Industries Ltd., India’s most valuable firm. But share sales by Colgate, Unilever and Cadbury, around the same time, also played a large role in broadening the reach of the capital market.

A half-century later, Hyundai’s IPO, too, gives the impression of being a seminal moment, even though prediction, as the scientist Niels Bohr once said, is very difficult, especially if it’s about the future.