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MNC Stocks – Defensive Value picks
Multinational companies (MNC) have historically enjoyed premium valuations to their Indian counterparts. This is primarily due to their
financial strength, strong parentage, good cash reserves, low debt exposure, asset light model and technological proficiency.
Professional management, transparency in operations and good working capital management aids maintain a safe image. Healthy
RONW / ROCE, good dividend distribution policies and clean financials attract investors. Most of these companies are debt free and
cash rich. Prudent management ensures aset reallocation whenever required and MNCs don’t tend to hold on to businesses/cash only
for pride.
While MNCs are as susceptible to market conditions as their Indian counterparts are, they have greater staying power in adverse
circumstances due to the sheer size and backing of the parent companies. Again, due to the parent companies, they have greater
access to export markets (though, at times, access to different countries is decided by the parent on other parameters). The parent
companies are often their customers too. Thus, overall, the general perception is that MNCs in general offer better value to
shareholders.
For years, MNCs operated in India through subsidiaries. They were forced to list on Indian stock exchanges in the late 70s due to the
enforcement of the Foreign Exchange Regulation Act. Over the years, litigation between MNCs and the state continued over issues like
parent company holdings, royalty paid to the parent, minority shareholder interests and so on. Previously, MNCs were happy holding
51% stake in their listed Indian subsidiaries but over the past few years it has been noticed that they have increased their shareholding
either through creeping acquisitions or open offers. Nestle, Unilever, Siemens, ABB and Vodafone are some such companies that fall
under this category.
The government’s introduction of minimum 25% float in any listed company could demoralize several MNCs from remaining listed on
the Indian bourses. Companies with over 75% stake could make open offers to acquire the remaining shares and thereafter, delist and
in some rare cases, divest shares through negotiated deals or public offers to offload the excess over 75% held by them.
The fact that the parents of Indian MNCs quote at a much lower P/E (except in a few exceptional cases like Glaxo, Hitachi and
Ingersoll) than their listed subsidies in India reflects two things – higher growth potential in India and lack of other investible high quality
stocks in India.
Parent MNC P/E
(trailing 12 months)
Indian subsidiary P/E
(trailing 12 months)
Abbott 19.3 32.6
Glaxosmithkline 45.1 29.1
Hitachi 150.1 22.6
Ingersoll-Rand 34.6 22.4
Kennametal 11.3 18.2
Marui Suzuki 5.0 15.5
P&G 16.9 37.8
Pfizer 15.1 20.5
Siemens 10.4 33.4
Unilever 16.7 32.3
(Source: Yahoo Finance, Capitaline, HDFC Sec Research)
As a result of the several factors listed above, MNC stocks are better placed in poor market conditions. The chart below shows the
performance of the CNX MNC index vs that of the Sensex and the S&P CNX500. While MNC stocks fell as well in the 2008-2009 global
economic crisis, it is evident the fall was subdued. In the upmove too, MNC stocks rose more than the general market. This trend gives
investors the comfort of lower losses and higher gains, a win-win situation. It is evident that investors like investing in MNC stocks
despite their higher valuations. The second chart below shows that the CNX MNC has traded at a premium to the Sensex for most of
the period since its inception and the premium has expanded lately.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
MNC Stocks – Defensive Value picks
Multinational companies (MNC) have historically enjoyed premium valuations to their Indian counterparts. This is primarily due to their
financial strength, strong parentage, good cash reserves, low debt exposure, asset light model and technological proficiency.
Professional management, transparency in operations and good working capital management aids maintain a safe image. Healthy
RONW / ROCE, good dividend distribution policies and clean financials attract investors. Most of these companies are debt free and
cash rich. Prudent management ensures aset reallocation whenever required and MNCs don’t tend to hold on to businesses/cash only
for pride.
While MNCs are as susceptible to market conditions as their Indian counterparts are, they have greater staying power in adverse
circumstances due to the sheer size and backing of the parent companies. Again, due to the parent companies, they have greater
access to export markets (though, at times, access to different countries is decided by the parent on other parameters). The parent
companies are often their customers too. Thus, overall, the general perception is that MNCs in general offer better value to
shareholders.
For years, MNCs operated in India through subsidiaries. They were forced to list on Indian stock exchanges in the late 70s due to the
enforcement of the Foreign Exchange Regulation Act. Over the years, litigation between MNCs and the state continued over issues like
parent company holdings, royalty paid to the parent, minority shareholder interests and so on. Previously, MNCs were happy holding
51% stake in their listed Indian subsidiaries but over the past few years it has been noticed that they have increased their shareholding
either through creeping acquisitions or open offers. Nestle, Unilever, Siemens, ABB and Vodafone are some such companies that fall
under this category.
The government’s introduction of minimum 25% float in any listed company could demoralize several MNCs from remaining listed on
the Indian bourses. Companies with over 75% stake could make open offers to acquire the remaining shares and thereafter, delist and
in some rare cases, divest shares through negotiated deals or public offers to offload the excess over 75% held by them.
The fact that the parents of Indian MNCs quote at a much lower P/E (except in a few exceptional cases like Glaxo, Hitachi and
Ingersoll) than their listed subsidies in India reflects two things – higher growth potential in India and lack of other investible high quality
stocks in India.
Parent MNC P/E
(trailing 12 months)
Indian subsidiary P/E
(trailing 12 months)
Abbott 19.3 32.6
Glaxosmithkline 45.1 29.1
Hitachi 150.1 22.6
Ingersoll-Rand 34.6 22.4
Kennametal 11.3 18.2
Marui Suzuki 5.0 15.5
P&G 16.9 37.8
Pfizer 15.1 20.5
Siemens 10.4 33.4
Unilever 16.7 32.3
(Source: Yahoo Finance, Capitaline, HDFC Sec Research)
As a result of the several factors listed above, MNC stocks are better placed in poor market conditions. The chart below shows the
performance of the CNX MNC index vs that of the Sensex and the S&P CNX500. While MNC stocks fell as well in the 2008-2009 global
economic crisis, it is evident the fall was subdued. In the upmove too, MNC stocks rose more than the general market. This trend gives
investors the comfort of lower losses and higher gains, a win-win situation. It is evident that investors like investing in MNC stocks
despite their higher valuations. The second chart below shows that the CNX MNC has traded at a premium to the Sensex for most of
the period since its inception and the premium has expanded lately.
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