Close your eyes and imagine you are in the late 1990s or early 2000s. Now, if you hear the words “affordable family car”, what comes to mind? The Maruti 800? That is one option. Think of something slightly newer, perhaps with a “xing”? We have it—the Santro it is.

The hatchback, launched in India in September 1998, caught the attention of many for its “tall boy” design, seating comfort and, importantly, that it was not a Maruti car. Where it couldn’t compete with peers like Maruti (on pricing), it changed tack: offering almost premium features at only slightly higher prices. And its biggest win was that it was promoted by Bollywood’s most loved actor at the time—Shah Rukh Khan.

It may have been SRK’s heroic charm—who was delivering hit after hit like Dil Se, Kuch Kuch Hota Hai, Dil Toh Pagal Hai and Dilwale Dulhania Le Jayenge at the time—or Santro’s features or a combination of both, but the car quickly became a bestseller, selling over 60,000 units a year within two years of its launch. For years, Santro’s sales shone, propelling its parent’s rise to among the country’s top automakers.

Circle back to today. Hyundai Motors, the South Korean maker of this iconic Santro and the second-largest automaker in the country, is now reportedly mulling an IPO of its India operations. According to reports, it is looking to raise at least $3 billion by diluting 15-20% and analysts believe this would put the valuation of Hyundai’s India operations at around $30 billion. If it goes through, this could be India’s largest IPO.

So, why is the carmaker interested in listing its India operations now?

The IPO route: According to a Reuters report, the IPO will help the auto giant unlock value for its India business. If Hyundai does manage to achieve its IPO target at a $30 billion valuation, the India unit would be over half of Hyundai’s $42 billion market capitalization. However, its market cap would still be behind peers Maruti and Tata Motors.

An India IPO will make it easier for Hyundai to raise money. Last month, it had announced plans to invest around $4 billion in India to expand production and launch new vehicles. A majority of this investment will likely be in Tamil Nadu and Maharashtra—where it is acquiring General Motors’s abandoned Talegaon plant.

According to a Forbes report, the fundraise could help Hyundai fulfil its capital expansion plans. It could also use the proceeds from the IPO to fuel the next phase of the automotive journey: building electric vehicles and cars that use alternative fuels—an area where it is currently lacking.

Last month, Hyundai India MD and CEO Un Soo Kim told the Times of India that electric vehicles will be a major focus area for Hyundai and the company is looking at producing them domestically. “We forecast that electrics will be around 30% of India’s car market by 2030, while for Hyundai the share will be upwards of 20%,” he said.

Hyundai’s plans to expand are in line with other automakers such as Maruti, Tata, Toyota and Mahindra, who have also announced similarly large investments as India’s car sales continue to grow. Expanding production capacity, launching new models (especially EVs) and investing in battery plants is on the agenda.

But if Santro’s now historic popularity is anything to go by, Hyundai seems in a decent place and has a clear market strategy—so why does it need to expand and cement its position? The answer is competition.

The market: The four-wheeler passenger vehicle market in India has largely been consolidated between four or five players and Hyundai has held on to the No. 2 position for two decades (mostly). It currently has about 15% of the market, second only to Maruti Suzuki’s 40% (though a distant second).

It managed this on the back of strong performers such as the Santro, i10, i20 and the Creta. According to FADA, total passenger vehicles sales in 2023 stood at 2.86 million units. Of this, Hyundai’s domestic retail sales was over 600,000 units—its highest ever.

But competition is increasingly heating up.

Maruti’s market share has hardly wavered in the price-sensitive Indian market where it has built trust and offers value for money. It seems unlikely that Hyundai will be able to bridge the staggering gap in market share unless there’s another Santro-like wave. Interestingly, Hyundai did try to reincarnate the Santro in 2018—with its entry-level models trying to take on hatchbacks such as Maruti’s Alto and Renault’s Kwid—but higher input costs and a variety of choices in the market dulled its shine and sales dwindled.

Hyundai is also increasingly being challenged by Tata Motors. The difference in market share between the two is barely one percentage point and there have been multiple occasions over the past two years—the latest being November 2023—where Tata’s retail sales have surpassed Hyundai’s.

What helps Tata Motors is its range of electric cars and SUVs, where Hyundai India has fallen behind.

Hyundai depends on the i10 and i20 hatchbacks for its volumes, but the growth in small car sales is narrowing year after year. Passengers are increasingly moving towards mid-size and micro SUVs that offer more comfort, features and space. While Hyundai has the Creta and Venue in those categories, Tata’s Nexon and Punch seem to be surging ahead.

Now the remaining categories are EVs and hybrid vehicles, where again Hyundai has limited presence in India. While it hasn’t shown active interest in making its mark in the hybrid segment, it has made its ambitions for EVs clear. Right now, it has only launched two of its EVs here—the Kona and Ioniq 5—and competes with Tata, which accounts for 70% of the country’s EV sales with electric versions of its Nexon, Punch, Tiago and Tigor.

But to Hyundai’s advantage, its vehicles have been category definers. Creta’s sales in the mid-SUV segment or the i10’s in the large hatchback segment are some examples. This means that Hyundai’s strategy to pack features and quality into its cars could go down very well in the EV market that is still in its nascent stage. Hyundai’s EV plans could change the automobile landscape significantly especially amid the rumoured entry of Elon Musk’s Tesla—which is also exploring a compact crossover likely below $25,000 (~Rs 21 lakh).

The other market: Hyundai’s IPO plans could also be a move to cash in on the booming equity market in the country. Analysts expect more froth on D-Street after the general elections, where polls have predicted an inevitable win for Prime Minister Narendra Modi’s Bharatiya Janata Party.

According to one person aware of the developments cited by Reuters, Hyundai wants “to make use of India’s IPO boom. India’s capital markets have hardly stood out like this before compared to other countries.”

Indian stock markets have had a stellar run, boosted by foreign investors who are looking at it as an alternative to China. India overtook Hong Kong to become the fourth-largest stock market recently. The country has also had an IPO boom and many companies are looking to cash in on the sentiment. Hyundai could also be one.

At a $30 billion valuation, Hyundai India would be valued at 53x its FY23 profit, which was Rs 4,709 crore (over $560 million), but such a high ratio may be justified considering its expansion plans and profitability—its FY23 net profit jumped 62% year-on-year.