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You can buy a BMW for less than a fourth of what you would pay for a
Maruti — on the bourses, that is. The BMW stock trades at a
price-to-earnings (PE) ratio of about 7 times on the Frankfurt Stock
Exchange, compared with the 27 times Maruti Suzuki commands on the
Bombay Stock Exchange. This case of a foreign stock trading much cheaper
than its Indian counterpart is hardly unique.
From food companies to drug makers, many foreign stocks trade at big
discounts to their Indian peers. The Kellogg Company stock quotes at a
PE of 23 times on the NYSE vis-à-vis the 42 times of Britannia
Industries on the BSE. Ditto for pharma major Eli Lilly, which is
available at 28 times against almost 40 times for Sun Pharma.
Stocks of several parent companies abroad also command lower valuations
than their Indian subsidiaries. 3M, for instance, quotes at 23 times
earnings compared with the 74 times of 3M India. The Nestle stock (26
times) is far cheaper than the Nestle India stock (111 times). So is
Unilever (25 times) vis-à-vis Hindustan Unilever (48 times).
So, is it a good idea to invest in foreign stocks that are available
relatively cheap? Some investors, including mutual funds, think so.
PPFAS Long Term Value Fund, started by seasoned value investor the late
Parag Parikh, invests about a quarter of its portfolio in foreign
stocks.
In a recent interview with BusinessLine, Neil Parikh, Chairman
and CEO of the fund, explained: “Today, whether it is Accenture, IBM,
Cognizant, TCS, Infosys or Wipro, they are in similar businesses. If I
like the businesses but feel the valuations here are high, I can invest
in markets abroad. Again, with companies such as 3M and Nestle, the
parent companies may be trading at lower valuations than the India arms,
presenting an investment opportunity. If you are in India, you need to
pay for growth. But how much more you pay and what are you comfortable
with — these are the questions.”
The growth factor
Many, however, believe that the higher valuation of Indian companies is justified given the superior growth potential in India.
Many, however, believe that the higher valuation of Indian companies is justified given the superior growth potential in India.
“Eventually, the growth opportunity of a company drives its stock
valuation. Indian companies generally have higher growth visibility.
Besides, companies such as Hindustan Unilever have high return on
equity, which helps valuation,” says Dharmesh Kant, Head of Retail
Research, Motilal Oswal.
“Then, there is the holding company discount that global entities such as Unilever with entities worldwide suffer,” he adds.
“It is prudent to buy stocks in individual countries. Investing in
global holding companies could mean exposure to risks of many countries.
Also, there is currency risk; betting on foreign stocks becomes a
currency play,” says Kant.
Besides, there may be sector-specific challenges in developed markets.
Patents on many pharma drugs have gone off or will do so in the coming
years. This could slow growth for pharma companies abroad but benefit
India’s export-oriented generic pharma makers.
Exceptions
There are exceptions though to the pattern of foreign stocks trading cheaper than domestic ones. Conspicuous are software and technology stocks. The foreign-based Accenture and Cognizant trade almost at par with TCS and Infosys, and are costlier than Wipro and HCL Technologies.
There are exceptions though to the pattern of foreign stocks trading cheaper than domestic ones. Conspicuous are software and technology stocks. The foreign-based Accenture and Cognizant trade almost at par with TCS and Infosys, and are costlier than Wipro and HCL Technologies.
Kant feels that this is due to the head-start foreign software companies have in the digitisation space, a key growth driver.
Then, there are the tech companies such as Alphabet (earlier Google),
Facebook, Apple and Amazon, which do not have comparable listed peers in
India.
Most don’t come cheap — Alphabet trades at about 29 times earnings;
Facebook quotes at 70 times. But that hasn’t stopped domestic investors
from betting on them. PPFAS Long Term Value Fund has nearly 12 per cent
of its corpus deployed in Alphabet.
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