Column: Sensex high, MNCs higher

Written by Shobhana Subramanian | Shobhana Subramanian | Updated: Nov 2 2013, 02:35am hrs
In January this year, Hindustan Unilever (HUL) said it intended to gradually up the royalty that it would pay Unilever Plc to 3.15% of sales, or roughly twice the amount it was paying then, in about five years. Understandably, the news upset investors; it also gave proxy advisory firms reason to carp about how multinational firms were sending back too much to their parent firms. Since the government liberalised the royalty rules in late 2009, through Press Note 8 lifting the cap on such payments, HUL was well within its rights to pay more. But since that would hit earnings, the HUL stock lost some value.

Interestingly though, had investors not sold their shares that day, at levels of R481, they would have made a small fortune; between then and July 23, when the stock hit a lifetime high of R718.90, it ran up some 50%. Such an appreciation in stock values is rare and happened only because Unilever said, in April, it was willing to buy out all minority shareholders in HUL at R600 apiece leaving only a float of 25% to comply with listing norms. But the fact is that those who stayed invested made good money.

Analysts and advisory firms are always quick to point out that MNCs pay out too much royaltythey argue that these are made at rates that are faster than those at which the companys sales and profits are growing. To suggest that companies of the size of an HULrevenues in FY13 were R27,003 croreshould be growing at the same pace at which royalties are paid out; R392.3 crore in FY13 doesnt seem rational. Maruti Suzuki, for instance, turns in revenues of close to R45,000 croreR43,588 crore in FY13 when it paid out royalties of R2,454 croreand to expect the company will keep up the sales momentum on such a high base is simply being too demanding.

Especially since, except for some brief periods, these stocks have not really disappointed investors in the long run; over the two decades between March 1991 and now, the HUL scrip has given shareholders a return of 5,000%, stupendous compared to what the rest of the market has donethe Sensex returned approximately 1,100%. Indeed, shareholders had little reason to complain because MNCs typically hand out generous dividends; HULs average payout over the last 15 years, for instance, has been upwards of 80% at 84%few Indian companies match thiswhile the return on equity last year was 103%.

And while it is true that not all MNCs have done well on the financial front, the same is true for a host of Indian companies. If an ABB has been struggling to win orders in the last couple of years thanks to the downtrend in capex, so has a Larsen and Toubro (L&T) or a BHEL. But shareholders have little reason to complain because in four out of five years between 2008 and 2012, the CNX MNC outperformed both the Sensex and the Nifty. In other words, investors were in fact much better off buying a bunch of Indian subsidiaries of MNCs than punting on home-grown enterprises. The short point is one cant chastise a set of companies simply because they pay royalty or too much of it.

To that extent it would also be regressive if the government reintroduces the cap on royalties, which it reportedly proposes to do. Apart from the fact that foreign investors are fed up with the governments arbitrariness on taxes and levies, the government needs to accept that the brands and technology that are being used by the MNCs here do have some value. To take the HUL example, its not for nothing that the company dominates so many categories despite competition from a dozen other firms. Thanks to HULs reach, seven-million-odd kiranas, which the government claims are so important to it, are able to stock its products. Market watchers estimate HUL sells more than 80% of its products through kiranaswhich is roughly R20,000 crore of business every yearand most MNCs give them seven days credit.

Theres no doubt whatsoever that MNCs are here in India because they see a big opportunity and can access a huge marketamong the largest catchments globally. So, essentially, theyre here to do business. But its also true that the sheer size of their businesses helps build ecosystemsthe kind that the government is hoping to create by allowing foreign multi-brand retailers into India. Since MNC brands, more often than not, are leaders in their respective categories or have sizeable shares, they are in a better position to promote entrepreneurship; this is particularly important in the semi-urban and rural markets from where HUL today earns roughly half of its revenues.

In the past there has also been criticism of MNCs that chose to buy back shares from the market or de-list; MNCs should share their profits with Indian shareholders was the general view. If the barbs continue, more MNCs will want to de-list and that cannot be good for the market.