Why investing in multi-national companies makes sense
Multi-national companies in India have long term track record and most of them have strong financials, which puts them on a must buy list.
August 24, 2015 / 01:25 PM IST
There is a lot of money to be made in the markets even if one imitates the investing styles of investment gurus. All of them have different investing styles. Some would be good at identifying growth stocks, while some look at stocks with a strong cash flow or some prefer buying stocks where the promoters award their shareholders by paying good dividends. Some others are good at looking at turnaround stories, still others buy stocks only when they have years of strong track record. Rather than being confused on the investing style to follow investors can look at common traits among all of them. Having said that, it is always better to have your own style and keep on developing it as we go ahead. Rather than running a scanner and trying to locate companies who qualify in all the above mentioned criteria, one way of finding such companies is restricting them to a group where at least the quality of promoter is taken care of, since that is the only subjective element in the entire process of stock selection. One such group is - multinational companies (MNC). Buying an MNC stock has enough safeguards in place with a scope of higher returns than the broader market.
One thing that every successful investor looks at is stocks with strong promoter and management. It is safer to invest in a company which is in a bad phase but has good promoters than to invest in a company that is having its day under the sun but has a tainted promoter. Good promoters and management can handle a bad situation and can work their way out, but a tainted promoter would look at ways to make money for himself rather than his shareholders when the times are good. The second important parameter is either low level of debts or no debts. If a company does not have much debt then it is generally in a strong financial state and is well placed to grab growth opportunities coming its way. Such companies are generally high dividend paying ones. On similar lines a company with a high cash balance or one with strong cash flows also indicates strong fundamentals. These companies are generating cash despite growing at a strong pace. Finally these savvy investors look at companies where the promoter is increasing his own stake either through a buyback or a preferential offer or a creeping acquisition. Promoter hiking his stake in the company betrays his strong conviction in the business and also hints at better days ahead.
Almost all the MNCs listed on Indian bourses have a strong promoter pedigree. All the companies are globally very strong players and derive on the strength of the promoter’s resources, financial as well as intellectual. Almost all of these companies have been in India for decades and have grown in the country despite increased competition. These companies are also generally debt free on account of their long history and presence in niche segments. Few MNC companies are in commodity businesses but almost all enjoy high margins in their businesses. Most of them do not hold debts in their books or those who do, their debt levels are miniscule. They hold decent levels of cash and are good dividend paying companies.
Because of their strong fundamentals and management qualities these companies have always been trading at a premium to their domestic peers. Market also rewards investors of these companies with higher returns. In the last one year ended on August 19, broad based BSE Sensex has returned around six per cent return while the MNC index during the same one year period has rewarded its investors with nearly 28 per cent return. Since most of these companies are held by strong investors and almost all good mutual funds, there are a few shares that are traded in the market. Also, since promoters of these companies generally do not issue new shares, restricted supply of stocks increases their premium.
But one of the strongest rationales that go in favour of MNC companies is their probability of getting de-listed from the stock exchanges. Most of these MNC companies have high promoter holding. Some are closer to the maximum promoter permissible limit of 74 per cent. An offer by the promoters to de-list the shares would mean that they would be willing to pay a premium to buyout all the shareholders.
There is also a sweetener for investors in delisting cases. According to the revised delisting norms also have a tax benefit. The shares tendered to the company in case of a delisting will not be subjected to capital gain tax. Foreign promoters are naturally keener on value unlocking in their parent company. Their Indian operations are a small part of their global businesses. Rather than following cumbersome listing norms many foreign promoters are happy in delisting their Indian operations, which will then be a 100 per cent subsidiary. With Indian economic scenario expected to improve going forward, the foreign promoter might be tempted to keep the higher profits to themselves rather than sharing it with other investors. MNC stock’s offer enough safeguards with a scope of higher returns than the broader market. Topping on the cake is the high probability of the company being delisted in the near future which is normally at a premium than market price. Plus, they normally fulfil all the parameters that a savvy investor looks for in a company.Author is Executive Director of Trade Smart Online