MNCs rewarded with high multiples in India, makes sense to monetise partial stake: BofA

Indian businesses of many MNCs are growing rapidly and the Indian market rewards these companies with extremely high multiples.

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Multinational companies paring stakes in their Indian units makes sense, given the high valuation multiples and availability of capital, said Raj Balakrishnan, Managing Director, Co-Head of Investment Banking, Bank of America. Further, the increasing deal sizes of MNCs’ Indian stake sales reflect the coming of age of Indian markets, he said in an interaction with CNBC-TV18.

Indian businesses of many MNCs are growing rapidly and the Indian market rewards these companies with extremely high multiples. Oftentimes, the underlying value of the Indian business is not reflected fully in the parent stock, Balakrishna said. That’s why it makes sense for MNCs to evaluate monetising part of the stake and using that as a tool for funding their operations or opportunities in other parts of the world, he added.

Earlier, this week, British American Tobacco sold 3.5 equity stake in ITC Ltd in a mega deal worth Rs 17,491 crore. The London-based company plans to use the sale proceeds towards its own share buyback, starting at GBP 700 million in the year 2024.

Bank of America was the adviser to British American Tobacco on the ITC stake sale. ITC shares jumped 8 percent in trade on March 13, following the stake sale by BAT, its top shareholder.

Also Read | BAT to sell 3.5% stake in ITC for Rs 16,775 crore in year's biggest block trade

Earlier, in February, Whirlpool sold 30.4 million shares, constituting a 24 percent stake in its Indian unit Whirlpool of India through the open market for $468 million. A few days after the stake sale, the MNC's CEO Marc Bitzer has clarified that there was no intention to quit India business and that the divestment was nothing but "basic arbitrage".

"In India we took our shareholding down to 51 percent. We believe in India for the long term, but if we have a business which is trading at 50 times multiple and your own company (parent entity) trades at a lot lower, it is basic arbitrage," Bitzer had told CNBC-TV18.

Also Read | Whirlpool to sell 24% stake in India business to reduce debt
Balakrishnan said that the deals also show the coming of age of Indian markets. "In 2023, we had done a $400-mln trade in the block trade window and now the executed trade was 5 times as large. So certainly, it reflects the coming-of-age for the Indian markets," he said. Also, with the availability of capital that exists for those companies, private equity firms are buying the stakes and MNCs are selling, which is the reverse of what used to be the norm, he added.

BofA was also the adviser to Timken for 8.4 percent stake sale in the Indian arm for Rs 1,890 crore.

On being asked about MNCs looking to exit India in the pharmaceutical space, Balakrishnan said that he does not think that MNCs are looking to exit India but are rather trying to optimise their portfolios.

Regarding the recent correction seen in the markets, Balakrishnan said that it should not unnerve the traders, since the Indian markets have outperformed other markets.

The Indian market has delivered returns superior to virtually every market in the world, be it on a 3-month, 1-year, 5-year, or 10-year basis, he said. "Even if there is a correction in the market for a week or a few months, it won't change the underlying trend.”