On April 30, when Hindustan Unilever Ltd (HUL)’s parent company, Unilever, declared its intention to increase the stake to 75 per cent from 52.5 per cent, the stock rose about nine per cent to Rs 597 from Rs 547.35.
Similarly, GlaxoSmithKline Consumer Healthcare Ltd rallied 20 per cent on the day its parent announced an open offer. Earlier this month, US-based McGraw Hill Financial, which owns ratings major Standard & Poor’s (S&P), proposed to make an open offer to raise its stake in ratings firm CRISIL to 75 per cent.
These are the three multinational companies (MNCs) where the parents have announced voluntary open offer. The industry expects more to happen. “There are possibilities of more MNCs’ parents increasing their stake in Indian arms. And, not just foreign companies; we might see even Indian companies sitting on cash piles increasing stakes in their subsidiaries,” says Vikram Dhawan, director at Equentis Capital, a UK-based advisory and analytics firm.
Hence, many experts say stocks such as Nestle, Bata, Colgate-Palmolive, Cummins, Procter and Gamble (P&G) and Gillette are on investors' radar.
But foreign companies are mostly seen wanting to hike stakes in their subsidiaries. This helps them at the time of passing resolutions, which can be done independently without having to wait for minority shareholders’ thumbs-up. They might even get paid higher royalty. And, the cost of funds is much cheaper abroad, at 1-1.5 per cent. These are some reasons why foreign companies are raising stakes in Indian arms to up to 75 per cent. The best example is Unilever Plc, which has a controlling stake in its units in Indonesia and Pakistan, while the Brazil, China, Russia and Mexico units are wholly-owned. Experts say emerging markets like India contribute more than half of Unilever's revenues.
Besides, growth in developed markets has slowed and India looks attractive due to the growing middle class population, high consumption and growth expectations.
However, some analysts believe the open offer might lead to HUL delisting. Similar to what Cadbury, Panasonic and Disney did. Even if the HUL stock does not delist immediately, it might in the next two-three years. If you hold a delisted stock, you will be stuck with the investment. When Cadbury delisted, its minority shareholders had to fight it out in a court to get the right valuation.
Hence, MNCs might not be an easy theme to play. If you do invest, have a very long-term horizon. “The price action in MNCs has been pretty good but if you have six months to a year, you will be disappointed. MNCs could be a good bet only if looked at for 5-10 years,” says Dhawan. If you are already holding these, stay put.
Hence, make sure to invest the part of your portfolio which might not be needed immediately or you will be in a soup.
Also, look to buy at a reasonable valuation. For example, last year, investors bought MNC stocks before these were expected to delist. But promoters opted for open offers instead and the stocks corrected significantly. If valuations are high, wait before putting in your money and do not overpay. And, always buy a stock based on its fundamentals.
Also, it’s believed that the run-up for MNC stocks is over and there is no significant upside. According to Piyush Garg, chief investment officer at ICICI Securities, these stocks are quite expensive. “Though there are chances that stock prices may not correct significantly from here due to the parent increasing stake, I am not sure as to how much money can be made in these stocks.”
Garg suggests cyclicals instead, because these may play out better on the back of an economic rebound in the future. He expects MNCs to give a maximum of 25 to 30 per cent over the next three to four years, when cyclicals could fare better.
“With MNCs, you need to know that there will be times when the stocks will give debt-kind of returns. Hence, those who have been opting for these stocks have been less greedy,” says Rahul Rege, business head-retail at Emkay Global.
However, it's not all gloomy. MNC stocks are considered safe havens. The positives about MNCs are that most are cash-rich, with very little debt on their balance sheets. Their dividend payout is also liberal and they have the highest corporate governance practices with a solid business model, says Nitin Jain, country head-capital markets (individual clients group) at Edelweiss Wealth Management. Hence, MNCs have a case to be included in a portfolio but selectively, he adds.
In comparison, many small- and mid-cap companies suffer from issues of corporate governance, while some large companies are unable to grow at a fast pace. Even the returns data says so. From data compiled by the Business Standard Research Bureau, these stocks have given better returns than the BSE's sensitive index, Sensex. In the past year, Colgate-Palmolive has returned at par with the Sensex (15 per cent). In the same period, HUL has given 33.50 per cent, Bayer Crop 75 per cent, P&G 37 per cent and GSK almost 123 per cent. In the past three years, as against the Sensex’s nine per cent, most of these stocks have fared way better (see table).
Says Rege: “MNCs outperformed till now because of being safe havens, on the back of good quality of business and management. If you are seriously looking to invest in good quality companies, opt for these but selectively.”
Experts suggest up to 30 per cent (varying with risk appetite) of an equity portfolio can be in MNC stocks.