Why a listing of Toyota’s India business will be a boon for Indian capital markets

The trend of multinational companies (MNCs) listing their Indian subsidiaries on domestic stock exchanges continues to gain momentum. Following Hyundai’s lead, global giants, like LG, are reportedly considering similar moves, recognising the growing importance of India as a market and an investment destination.Maruti Suzuki and Hitachi Energy, owned by Japanese MNCs, have already demonstrated how a listed subsidiary can create long-term value for shareholders in India, backed by solid performance.Given the impressive growth trajectory, strong financials, and India’s evolving auto landscape, Toyota Kirloskar Motors (TKM) stands out as a prime candidate for a future listing. Could TKM be the next success story in this trend?The growth trajectoryTKM has demonstrated remarkable growth in the Indian market over the past few years. Here’s a snapshot of the company’s performance from FY19 to FY24:● 23% compound annual growth rate (CAGR) in sales growth● 46% CAGR in operating profits● Fourth-largest automaker by revenue in FY24 !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r=0;r !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r=0;r The company’s upward momentum continues into FY25, with impressive performance in H1:● 30% growth in domestic dispatches, making it the fastest-growing large domestic carmaker● Surpassing Mahindra & Mahindra, which grew by 21%, while Maruti, Hyundai, and Tata Motors grew much slower, according to SIAM dataGiven the trend of rising sales at TKM and subdued sales growth and margin headwinds at Hyundai, it seems likely that TKM could generate as much profits as Hyundai India, which boasts a market capitalisation of around $18 billion.This growth trajectory suggests that TKM could fetch a valuation north of $20 billion, potentially as much as 10% of the parent company’s market capitalisation. The valuation of TKM would be sufficiently large for its parent to consider a listing. medium nocaption115419932 medium115420900This raises a key question: what drives the best long-term equity returns?We believe the answer revolves around four key elements:1. A long runway for growth2. Strong returns on investment (RoI) to fund growth initiatives3. Generous cash flow to pay dividends to shareholders after investing4. A reasonable valuation, avoiding overpayment by investorsTKM has the potential to be a strong investment, should Toyota Motors decides to list in India.Let’s break down how TKM fits into this framework.A long runway for growthThe Indian passenger vehicle market is shifting towards premium cars priced between Rs 20 lakh and Rs 30 lakh, growing from 3% to 11% in five years, as per cargraphical.com.Toyota can capitalise on this trend by manufacturing more of its popular global models in India and building affordable options developed jointly with Suzuki and Daihatsu.The jointly developed eVitara with Suzuki is a promising start. With the right strategy, TKM can leverage its global models and local partnerships to create long-term value for Indian shareholders. !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r=0;r !function(){"use strict";window.addEventListener("message",(function(a){if(void 0!==a.data["datawrapper-height"]){var e=document.querySelectorAll("iframe");for(var t in a.data["datawrapper-height"])for(var r=0;r Strong RoIStrong return on investment (RoI) is a hallmark of TKM’s financial performance. In FY24, the company delivered an operating profit of around Rs 6,000 crore and free cash flow of around Rs 5,800 crore.What’s truly remarkable is that these solid returns were generated from a net asset value of property, plant, and equipment of just around Rs 3,400 crore.Additionally, TKM boasts cash and cash equivalents exceeding Rs 11,000 crore, surpassing its net worth of Rs 8,200 crore. This impressive return on investment enables TKM to easily fund growth initiatives and distribute decent dividends to its shareholders.Mirroring the approach of many successful MNCs, TKM’s financial discipline and efficiency position it for long-term success.Growth mode: ONTKM is not resting on its laurels. The company is actively expanding its footprint in India through new dealerships, production plants, and product range, suggesting that the growth journey has just begun.Close on the heels of impressive results last year, TKM is poised to play a pivotal role in Toyota’s global strategy. From 2024, India will become a global hub for Toyota’s greener mobility solutions, serving West Asia, East Asia and Oceania regions.In a significant development, the managing director of Toyota India will also assume the role of regional head, overseeing operations in India, West Asia, East Asia and Oceania.The right strategyInvestors will be hopeful that a potential listing by TKM will avoid the mistakes made by Hyundai, such as listing during a period of market share losses rather than growth. Additionally, investors will be looking for a moderate valuation that leaves some upside potential, rather than overly aggressive pricing that leaves little room for share price appreciation.A well-executed listing could provide a welcome boost to Toyota’s brand equity, much like how Maruti Suzuki’s long listing has bolstered its position in the Indian market.Graphics by Mohommad Arshad