MNCs still remain consistent wealth compounders on Dalal Street. The top wealth creators for last 10 years have been Britannia Industries, Abbott India, Honeywell Automation India as per our recent research on 75 listed MNCs.
The MNC space is a very attractive one in India. MNCs in India are those in which foreign shareholding is in excess of 50 per cent and/or management control is vested in a foreign company.
Here I would like to list out some of the findings of this research:
ROE: For most of these MNCs, ROE is more than 15%. This shows the management’s ability to generate superior returns. Hindustan Unilever tops the list on this count with a phenomenally high 80 per cent ROE.
VALUATION: Shares of multinational companies in India, often called MNC stocks, enjoy premium valuations relative to their Indian peers.
PE RATIO: Multinational companies enjoy higher PE ratios and the market is willing to pay a higher price compared with their Indian peers.
INTEREST COVERAGE RATIO: This indicates that the financial health of these companies is very good.
DEBT-EQUITY: This ratio isclose to zero for most of the MNCs, which indicates that most of the MNCs are less debt dependent or are debt free. Usually they have asset-light models with low capex and do not need large funds for business expansion. Bata has a debt-equity ratio of 0.66, others have very negligible or zero debt.
FINANCIAL STABILITY: Financially, these companies are highly stable and they have good Piotrski Scores.
CASH: Many companies like Nestle India, GlaxoSmithKline Consumer Products have substantial cash reserves on their balance sheets, almost equivalent to their net worth.
DIVIDENDS: MNCs pay high dividends and distribute a significant portion of their earnings by dividend to reward their parents. Nestle has highest dividend payout and only 3M India does not pay any dividend.
CORPORATE GOVERNANCE: Corporate governance and financial reporting standards are very high and much better than other similar sized companies.
ROYALTY: MNCs pay high royalty payments to its parent company. Maruti Suzuki pays the highest to its parent Suzuki, Colgate-Palmolive, Hindustan Unilever and Nestle India also make large royalty payments. Royalty is a standard practice globally
100% OTHER SUBSIDIARIES: Many MNCs operate through multiple entities and have and carryon business through 100%-owned subsidiaries, which deprived the listed Indian company of new growth opportunities. While companies like Abbott India, Pfizer, Sanofi India, AstraZeneca Pharma India, Procter &Gamble have been operating through 100% own subsidiaries, such companies are few.
There is always a demand for consistent performers. MNC FMCG companies dominated the list of consistent wealth creators due to their above-average returns and non-cyclicality of business. HUL, Colgate-Palmolive, Britannia Industries, Procter & Gamble, Abbott India, Nestle India, GlaxoSmithKline Consumer Products and others have rewarded consistent wealth to its investors.
Considering some performance parameters, here is a list of companies that can be distinguished as outperformers:
Markets/investors attribute this premium to a host of factors
.Superior growth profiles of multinational companies are due to their proprietary technology, brands, intellectual property, efficient management or other intangibles
.Better corporate governance and financial reporting standards. Less risk and variability of cash flows contributes to lower beta and which makes them better baits in market decline
.Higher dividend payouts
MNCs with their superior ROE, ROCE, high dividend payouts are expected to outperform more so in the current situation since they have low/zero debt. Their share prices decline much less when the market crashes, like it happened in March. MNCs were the biggest beneficiaries of lower corporate taxes announced in 2019 since they’re in higher tax slab and pay high income tax. Their earnings, returns to investors are expected to expand further.
Sanghvi is Director of MSS Securities. Views are his own)
(Disclaimer: The opinions expressed in this column are that of the writer. The facts and opinions expressed here do not reflect the views of www.economictimes.com.)