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    Do Indian MNCs deserve to trade at a premium?

    Transcript

    Mar 18, 2024
    2 Mins Read
    Chanchal Khandelwal

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    Many articles I have read of late compare India's premium to global counterparts, with many MNCs using the Indian currency for acquisitions and global funding. This is important to provide perspective on why Indian Multinational Companies trade at a premium, command a premium and will continue to do so.

    MNCs check all the boxes investors look for - strong brand recognition, extensive market share, global tech knowledge, innovation capabilities, and scalability. Most of these companies have been around in India for 40-90 years and have a deep understanding of our markets. In addition to strong financials in the form of robust revenues and margins, these companies are low on debt or not leveraged at all. Return on equity is generally very high, and very often they build fresh capex from internal accruals. They also have strong corporate governance practices. This brings to the table a lot of credibility and reliability. These factors contribute to their premium valuations, with investors assigning higher multiples to MNCs given the above factors and longevity of growth, compared to their overseas parent companies.


    In this article I authored in September 2023, I highlighted how India, with its many structural drivers, is attracting MNCs to increase their India footprint. In recent years, as Western economies grapple with inflation, high-interest rates, geopolitical tensions, and slowing growth, the Indian arms of MNCs have become key growth drivers for their overall financials, resulting in more and more MNCs bolstering their India strategy.


    The growth of Indian companies is much superior. If we look at the net profit growth of Hindustan Unilever over ten years, it stands at 12% CAGR, whereas Unilever's is 4% CAGR. The operating profit of most global companies is less than 5% CAGR in a decade, whereas that of their Indian counterparts would range between 8 to 12%. Indian capital goods companies like ABB or Siemens also demonstrate nearly double the CAGR of their global counterparts. This indicates that Indian companies should trade at a much superior multiple.


    MNCs still view their India operations as a strategic asset. For example, in the cases of Whirlpool, British American Tobacco (of its share in ITC) and Timken, the companies required currency for global acquisitions and debt reduction and sold some part of their Indian assets. They chose not to divest totally because India is strategic in their overall scheme of operations.


    Unilever used Indian shares as currency to acquire Glaxo India, which seems like a good strategic move. As for whether Glaxo was a good asset, let's leave that question for them to prove. Was it a smart call to finance such a high acquisition using Indian currency? Only time will tell.


    In fact, shareholders who invest in the parent company may wish to inquire as to the rationale behind divesting from assets with substantial potential for sustainable returns, such as their India businesses, and allocating those funds towards the pursuit of global expansion strategies. MNCs demonstrating a genuine commitment to enhancing their presence in India and building their Indian enterprises as hubs for global operations are likely to achieve success. I firmly believe this approach holds promise. In fact, some MNCs have opted to consolidate their unlisted entities in India, thereby fostering a unified arm of business to pursue both Indian and global objectives, while concurrently allowing minority stakeholders to take part in their growth story. We hold ownership in some of these enterprises. An example would be the automotive and industrial supplier brand Schaeffler. This approach is highly admirable and hope that their pioneering practices inspire others in the industry.


    Despite occasional underperformance due to global challenges, the Nifty MNC TRI index has outperformed the Nifty 50 TRI over a 10-year period. MNCs have consistently demonstrated revenue and profit growth superior to broader market indices. Nifty MNC has delivered 10-year CAGR returns of 17.21% whereas that of Nifty 50 is 12.39%.

    In what appears to be one of the best nominal growth economies, with some of the best companies in corporate governance and visibility of growth, wouldn't you pay a premium for them and still own them?


    Sources:
    https://www.livemint.com/companies/news/positive-on-india-sold-stake-as-valuations-were-high-says-whirlpool-ceo-11709001689259.html
    https://www.cnbctv18.com/business/companies/timken-cuts-til-ownership-to-57-pc-in-strategic-share-sale-19257371.htm


    The views and opinions expressed are those of Chanchal Khandelwal, Fund Manager & Senior Analyst and do not necessarily reflect the views of Aditya Birla Sun Life AMC Ltd (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”). This is not a recommendation, offer or solicitation of business or to buy or sell any securities or to adopt any investment strategy. Aditya Birla Sun Life AMC Limited (“ABSLAMC”) /Aditya Birla Sun Life Mutual Fund (“the Fund”) is not guaranteeing/offering/ communicating any indicative yield/returns on investments. The sector(s)/stock(s)/issuer(s) mentioned do not constitute any research report/recommendation of the same and the Fund may or may not have any future position in these sector(s)/stock(s)/issuer(s). ABSLAMC has used information that is publicly available including information developed in house. Information gathered and material used in this document is believed to be from reliable sources. Further the opinions expressed and facts referred to in this document are subject to change without notice and ABSLAMC is under no obligation to update the same. Further, recipients of this report shall not copy/ reproduce/quote contents of this document, in part or in whole, or in any other manner whatsoever without prior and explicit written approval of ABSLAMC. Past performance may or may not be sustained in the future.


    Mutual Fund investments are subject to market risks, read all scheme related documents carefully.



    Chanchal Khandelwal

    About Author

    Mr. Chanchal Khandelwal is a Fund Manager and Senior Analyst at Aditya Birla Sun Life AMC Limited (ABSLAMC). With an overall experience of more than 15 years, he has been a part of the Aditya Birla Group for 15 years, with nearly a decade with ABSLAMC. He was part of the Strategy and Finance team at Aditya Birla Group.

    At ABSLAMC Chanchal is responsible for managing select Equity funds as per given mandate while focussing on supporting the entire equity fund management team in their respective mandates through effective sector research on areas allocated.

    Chanchal has done his B.Com Honours from SRCC and is an MBA from Xavier Institute of Management, Bhubaneshwar.

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