Buying multinationals: will they deliver?

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: In the late 70s, India saw many multinational companies (MNCs) getting listed on domestic stock exchanges. All credits to the socialist government of Moraraji Desai. Wise investors sensed the opportunity and grabbed these counters at attractive valuations. Most of these big boys delivered well and never let their investors down. At least over a long period of time, MNCs in India turned out to be true wealth creators.

The global experience and advanced technology, along with deep pockets that helped them to face rough weather, made the investments in MNCs a formidable proposition. The professional management and focussed business models avoiding unrelated diversification, added value to the shareholders. Most of the MNC counters were known for the rich dividends they paid, as it was the only way to take the money home for the parent.

Most of the diversified equity funds have an exposure to quality MNCs with an expectation of good performance. In the last years of the 20th century, Indian capital markets saw three schemes launched that invest in MNCs with an objective to invest predominantly in MNCs listed in India.

However, over a period of time, the MNC funds across fund houses have lagged the broad markets. This is primarily due to falling investor interest in the MNC counters. At the same time we have come across many foreign promoters delisting their Indian subsidiaries. The delisting norms also underwent a sea change. In 2002, Indian capital markets saw the exit of Kodak, Cadbury, and Reckit & Benkiser. The trend continues. This year we saw the likes of Wartsila India and Syngenta India leaving the Indian capital markets. With the advent of private equity and simplified delisting norms, the space is expected to shrink further.

Some of the foreign companies opted for introducing new products through their privately owned subsidiaries sidelining the publicly listed companies. Some went further and ensured that the publicly listed companies would sell their businesses to the privately owned subsidiaries of their parents. These measures ensured that the space becomes unattractive and the investors will dump the counters. The same is visible in the lackluster performance of MNC funds from all three houses. For details do refer to the table. The funds are able to float due to the small sizes of assets under management. Attractive sectors like engineering and infrastructure have few MNC plays and the ones that exist are richly valued.