Blogs from Capital Portfolio Advisors

India has been an attractive economy for global multinationals due to her attractive demography. Be it agriculture, consumption, manufacturing, infrastructure or services, India presents a massive opportunity, despite the bureaucratic bottlenecks. Several MNCs, over the years have successfully negotiated the speed-breakers and have garnered pole positions in the sectors that they have been present in. Some MNCs have the distinction of having participated in the India growth story for over a century!

Within this large pool of MNCs, there are many that are listed with a majority holding in excess of 51% but limited to 75%, and there are many more who have chosen to stay unlisted. Those who are listed have a low float within which both the institutions and retail investors jostle to invest into.  Hence, liquidity for these stocks has always been an issue and probably will remain so.

A multitude of investors have been staunchly loyal to their investments in MNCs, due to the following strengths, of these companies:

  • Professional management
  • Smooth succession plan
  • Access to products and technology
  • Strong balance sheet and profitability
  • High employee productivity
  • Focus on building brands and distribution network
  • Strong pricing power
  • Asset light business model
  • Focus on local market
  • Liberal dividend distribution
  • Focus on organic growth
  • Lower volatility in stocks
  • Good compounding machines

While these are some of the key characteristics of MNCs, it would be worthwhile to understand some of the risks too, when investing in these companies:

  • Royalty payments
  • Transfer pricing
  • Lower liquidity in stocks
  • IPR issues especially in pharma and tech
  • Slower new product launches relative to Indian counterparts
  • Slower business growth compared to competition from Indian companies
  • Inadequate transparency of the management

Let us now see how various stocks have grown their earnings and how their prices have performed over the last 10 years. These details follow in the table below:

Comparison of business growth and price growth:

Company Name Year End 10 YR SLS 10 YR PROFIT  10 YR STOCK
    CAGR(%) CAGR(%) CAGR(%)
3M India Ltd. 202103 8.14 5.09 16.82
ABB India Ltd. 202012 -0.77 13.24 8.24
Abbott India Ltd. 202103 15.31 21.98 29.16
ACC Ltd. 202012 5.25 2.87 8.63
Akzo Nobel India Ltd. 202103 8.24 -0.50 9.38
Ambuja Cements Ltd. 202012 12.81 3.74 11.46
Bayer CropScience Ltd. 202103 7.14 12.67 22.19
Bosch Ltd. 202103 3.82 -5.02 6.91
Colgate-Palmolive (India) Ltd. 202103 7.79 2.55 13.82
CRISIL Ltd. 202012 12.17 -16.41 12.87
Cummins India Ltd. 202103 0.76 -2.61 8.97
Esab India Ltd. 202103 3.13 0.06 14.62
Grindwell Norton Ltd. 202103 7.47 3.64 25.84
Heidelberg Cement India Ltd. 202003 8.77 7.48 23.00
Hindustan Unilever Ltd. 202103 8.91 12.33 23.55
Johnson Controls – Hitachi Air Conditioning India Ltd. 202003 13.11 4.34 30.50
JTEKT India Ltd. 202003 5.88 3.79 21.60
Kennametal India Ltd. 202006 6.64 -4.19 6.61
KSB Ltd. 202012 7.07 -2.17 18.55
Maruti Suzuki India Ltd. 202103 6.60 5.83 19.38
Nestle India Ltd. 202012 7.88 9.79 16.69
Oracle Financial Services Software Ltd. 202103 5.22 4.45 9.64
Pfizer Ltd. 202103 5.98 3.67 15.62
Procter & Gamble Health Ltd. 202006 11.10 14.52 24.03
Procter & Gamble Hygiene and Health Care Ltd. 202006 12.75 9.19 20.72
Sanofi India Ltd. 202012 10.34 7.56 15.47
Schaeffler India Ltd. 202012 13.72 2.45 19.34
SKF India Ltd. 202103 2.59 6.02 16.10
Timken India Ltd. 202103 11.79 9.04 22.54
Wabco India Ltd. 202003 12.56 7.34 19.55
Whirlpool Of India Ltd. 202103 8.12 8.47 25.79
Nifty       12.98
Nifty MNC       14.63
Source: Ace Equity, CAGR Returns as of 20/8/2021

The following observations can be made from the table above:

  • The average sales growth of the basket would be tad above the GDP growth. The profitability at the net levels, however trails the sales growth in most cases. Our studies indicate that the operating margins in most cases have improved and so have the return ratios. The lower net profit growth could be a function of tax incidence and extraordinary charge-offs, that many of these companies have undertaken to improve efficiencies.
  • The stock price growth has been stronger than the business and profitability growth, indicating a sharp re-rating of multiples. Prices of most stocks have outperformed their benchmarks. The Nifty MNC index has done better than the Nifty. 
  • There seems to a bias in favour of consumption and pharma stocks. Industrial stocks have trailed these sectors. India growth story has over the years been driven by services and consumption rather than manufacturing, which is reflected in most of our indices too
  • These stocks with their measured pace of business growth have been good compounders for investors over the years

The outlook for this segment continues to be promising due to the potential in India with the added bonus of unlocking of the China +1 opportunities. If vexatious issues like infrastructure, IPR, taxation, etc. among others are addressed, India could attract far more interest from these global giants!!

It has been our endeavour to communicate our thoughts, analysis, observations, etc through our blog. The language and the contents have deliberately been kept simple, for easy comprehension. It would be helpful, if readers send their feedback through the comment box, to enable us to improve further.

Happy investing!!

Disclaimer

This article has been written by Team Capital Portfolio Advisors. Any part of the content of this article should not be construed as, an offer or solicitation to buy or sell any securities or make any investments. The content shall not to be relied upon as advisory or authoritative or taken in substitution for the exercise of due diligence and judgement by any user nor should it be used as a basis for making any decisions, without exercising user’s own judgment or diligence. As a condition for using this Blog, the user agrees that Capital Portfolio Advisor (CPA), its Founder or any of it’s employees make no representation and shall have no liability for any loss or damage, direct or indirect, arising from the use of the Blog. CPA reserves the right to change the content of the Blog without prior notice.

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