Buying multinationals: will they deliver?

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.

The MNC speciality chemicals and pharma space is continuously under performing, barring a few exceptions. In 2000, there were tech counters visible in the portfolios of MNC funds. Though, the dot com bust brought down the NAVs of those who had exposure to these Tech MNCs of Indian origin. Due to the recent rise in the rupee against the dollar, the tech space is also experiencing the heat, leaving less legroom for the fund managers to maneuver.

Despite all these adversities, going forward, there can be some opportunities that you may spot. Cement as a sector has attracted the attention of many global players. Holcim, Heidelberg along with the recent entrant Cimpor has underlined this opportunity. Though, some of the analysts argue about the valuations being at the highest levels. Investors willing to take a bet on MNC businesses can consider such stocks. A case in point, UTI MNC fund holds ACC.

The next sector to watch out for is the banking and financial services. The India growth story will throw open many doors for those who believe in long-term wealth. An obvious beneficiary, the banking and financial services is attracting foreign interest. The broking houses are enjoying sky-high valuations. Today, the stakes picked up by foreign players in the Indian brokerages are small, these are likely MNC plays in the long run, as there certainly will be some cases of buyouts in the long run.

The banking sector on the other hand is all set to undergo reforms. Post March 2009; there is a higher possibility of consolidation in the sector. The existing shareholding patterns of most of the private sector banks indicate foreign interest in the banks. These are the counters to be bagged with a long-term view, as most probably these are tomorrow?s MNC.

Indian pharma companies and auto and auto ancillaries have not delivered over the last couple of years over the stock exchanges. However, some of them operate globally and have the potential to deliver over a long period of time. You will be better of picking up those who may emerge as true wealth creators. Engineering giants like Larsen & Toubro too, over the period, will join ranks with its MNC counterparts.

Money was made in MNCs not because foreigners owned them, but it was because of their global expertise and ability to deliver in all times on the back of the competitive advantages they enjoyed. It is high time that you check your definition of MNC and find out opportunities that qualify to be termed as MNCs. Money will be made in the long run, though in the short term there may be some amount of volatility, giving opportunity to accumulate these wealth creators.