Investors give MNCs cold shoulder

Investors seem to be losing interest in multinational companies (MNC). More so after Hindustan Unilever’s (HUL’s) decision to increase royalty payments to its Anglo-Dutch parent Unilever Plc. While the HUL’s share price fell 4.3 per cent on Wednesday, the stock of Cairn India, Colgate-Palmolive, GSK Pharma and Ranbaxy Laboratories took a beating with their prices falling by one-three per cent (see table).

HUL’s board had on Tuesday approved royalty payment at the rate of 3.15 per cent on company's annual turnover, effective February 2013. HUL, the fourth largest royalty payers among Indian companies, paid Rs 300.90 crore for FY12. Assuming some growth, proxy advisory firms such as IIAS has estimated HUL’s royalty payments to its parent to be as high as Rs 900-1,000 crore in the coming year.

Maruti Suzuki (Rs 1,803 crore), ABB (Rs 374.9 crore) and Nestle (Rs 316 crore) are the top royalty paying subsidiaries of multinationals, according to an IIAS report.

LOSING SHEEN
Name	Jan 22, ‘13	Jan 23, ‘13	% change
ABB	682.25	686.55	0.63
CASTROL INDIA	300.80	301.80	0.33
CUMMINS INDIA	492.10	493.65	0.31
MARUTI SUZUKI INDIA	1570.10	1573.70	0.23
ORACLE FINANCIAL SERVICES	3316.85	3311.85	-0.15
SESA GOA	185.05	184.65	-0.22
MPHASIS	375.55	373.90	-0.44
SIEMENS	648.75	645.40	-0.52
AMBUJA CEMENTS	198.30	197.05	-0.63
BOSCH	9171.65	9103.65	-0.74
RANBAXY LAB	473.70	468.20	-1.16
CAIRN INDIA	332.40	328.20	-1.26
CNX MNC INDEX	5624.80	5524.10	-1.79
GSK PHARMA	2148.80	2102.25	-2.17
COLGATE-PALMOLIVE	1483.80	1430.80	-3.57
HINDUSTAN UNILEVER	480.90	460.05	-4.34
Compiled by BS Research Bureau

“The entire issue of royalty payments lacks transparency,” said J N Gupta, founder and managing director, Stakeholders Empowerment Services. According to Gupta, there is no basis to which these companies arrive at a certain royalty payment. “If a particular company has seen growth as per industry and market standards and not any unusual rise, then of what basis should promoters outside the country get a higher royalty?” he asked.

“In the short-term, investors may not like MNC stocks. But the effect of these royalty payments will temper over the next three-four years. So, MNC stocks will be attractive around a year after now," said Ambareesh Baliga, independent equity advisor.

Proxy advisory firms say higher royalty is justified at least when a company outperforms the industry benchmarks by a wide margin.

With Indian subsidiaries now having easier access to technology, know-how, use of brand names and trademarks, the revenues for these companies should have shown higher growth in comparison to the restricted-royalty era.

However, IIAS found that year-on-year net sales have grown by just 1 per cent, Ebitda (earnings before interest, taxes, depreciation and amortisation) growth has dipped by a considerable 9.3 per cent, indicating that transfer of technology has brought neither more efficient manufacturing nor higher realisations for the brand.