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Weak demand & high discounts dent 2Q performance 

Well-positioned to benefit from the premiumization trend in India

* Hyundai Motor (HMI)’s 2QFY25 performance was hit by ~9% YoY volume decline and higher discounts, leading to a 30bp YoY/70bp QoQ EBITDA margin contraction to 12.8%. While the PV industry’s demand remains moderate, we expect HMI to post steady growth given its favorable SUV mix and strong export opportunities going forward.

* We broadly retain our FY25E/26E EPS. We assign a slightly higher multiple to HMI at 27x Sep’26E EPS, compared to MSIL’s 26x, given its strong parent support for new technology, superior financial metrics, a relatively premium brand perception, and better alignment with industry trends. We reiterate our BUY rating with a revised TP of INR2,235. Higher discounts and operating deleverage dent margins sequentially

* HMI’s 2QFY25 revenue/EBITDA/PAT grew ~8%/10%/16% YoY to INR172.6b/ INR22.1b/INR13.8b. Its 1HFY25 revenue/EBITDA/PAT was -2%/+2%/-3% YoY; we expect the same to be ~+2%/-12%/-22% YoY in 2HFY25.

* Volumes declined 8.5% YoY (flat QoQ). Net realizations grew 1% YoY (flat QoQ) to INR899.3k/unit.

* Gross margin contracted 60bp QoQ due to incremental discounts during the festive season. Discounts in the domestic market increased to 1.9% in 2Q from 1.5% in 1Q.

* EBITDA margin came in at 12.8% (-30bp YoY/-70bp QoQ), while the EBIT margin dipped 30bp YoY to 9.8%. The sequential margin impact was due to higher discounts and weak demand.

* CFO/FCF for 1HFY25 stood at INR8.4b/-INR6.98b vis-à-vis INR40.3b/ INR26.6b in 1HFY24.

Highlights from the management commentary

* Domestic demand: HMI has guided a low single-digit growth for the PV industry in FY25, on the high base of last year. Overall performance was weak in 2QFY25 as volume decline was due to domestic slowdown and geopolitical challenges, impacting exports. However, higher demand for SUVs and the marriage season in Nov’24 render confidence of a steady demand in 3Q.

* Rural demand remains positive: HMI believes that better crop output led by healthy monsoons should drive rural demand in the coming months. Rural contributes ~21% of overall volumes for HMI vs. 20% last year, which used to be ~16.5-17.0% a few years ago.

* Exports: Most of the countries, particularly Africa, Mexico, and LATAM, witnessed volume growth in 1HFY25. However, regions such as the Middle East faced headwinds due to the Red Sea crisis. The company reiterated that India will be its production hub for the emerging markets.

* New product launches: HMI has lined up four new EV launches, beginning with the Creta EV scheduled for 4Q launch. While HMI did not provide specifics on the upcoming ICE models, it noted that the company will continue to target white spaces and explore new and growing segments.

Valuation and view

* While FY25 is likely to be a moderate year for PVs in India and consequently for HMI, we project the company to report an 8% volume CAGR over the next two years. Following a moderation in FY25E earnings, we expect HMI to post 14% earnings CAGR over FY25-27E.

* When comparing HMI with MSIL, which is its closest peer, we believe that while both OEMs are very close in competency and future growth potential, we can ascribe a slight premium to HMI over MSIL given: 1) HMC’s technological prowess in emerging technologies that can be customized to meet Indian customer requirements as needed; 2) superior financial metrics; 3) a relatively premium brand perception; and 4) better alignment with industry trends.

* We hence assign a 27x Sep’26E PER multiple to HMI, relative to our target multiple of 26x currently assigned to MSIL. Therefore, we arrive at our TP of INR2,235 for HMI, and reiterate our BUY rating on the stock.

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