MNC stocks trading at all-time high valuations, time to stay selective

With half the listed MNC stocks trading near their all-time high valuations, experts say it's time for investors to cherry pick from the lot

Stocks of multinational companies (MNCs) such as Hindustan Unilever (HUL), Siemens, ABB, Bata India, Astrazeneca Pharmaceuticals, Bosch, Pfizer and 3M India are trading at near their all-time highs. Valuations, too, have accordingly sky-rocketed and a majority of them – about 30 out of 43 MNC stocks listed in the bourses - are trading at about life-time high valuations. Priced at over 50x trailing earnings, experts say the bets are quite high on the MNC names, especially those in the consumer staples, healthcare and engineering baskets. “MNC stocks have always been expensive compared to their domestic peers for their branding and intellectual property acquired from their parent companies,” says Pankaj Pandey, head of research at ICICI Direct.

Therefore, with the underlying operating climate turning weak, Pandey explains that MNCs tend to be more equipped to beat the growth trend and outperform the pack. Hence to that extent, experts say the premium these stocks command appear justified. In fact, among consumer staples, stocks such as Britannia, HUL, Colgate-Palmolive and P&G Hygiene trade at valuations upwards of 60x price-earnings (PE) on hopes that with the competitive intensity having significantly reduced over the last two years, they would gain even if there isn’t a huge improvement in the underlying demand. Surprisingly, over the last year, names in the healthcare segment which don't participate much in market rallies, such as Merck and Astrazeneca, lead the pack with largest multiples expansion, while that of Sanofi, GSK Pharmaceuticals and Pfizer, have witnessed 20 – 50 per cent gains in their PE. They are trailed by those in the consumer staples basket - up over 15 per cent in this period. While stocks in the engineering and automobiles segments such as ABB, Siemens, Bosch and Cummins too have seen re-rating, they lag that of retail-oriented MNCs.

	FY18	Current*	Increase%
Merck	22.78	63.48	178.7
Astrazeneca	89.43	210.41	135.3
Bata India	41.95	82.00	95.5
Astro Nobel	20.96	39.98	90.7
Pfizer

*Trailing 12-months price-earnings
Source: Bloomberg | Compiled by BS Research Bureau

There’s a word of caution, though. As a fund manager of a domestic fund house points out, MNC stocks aren’t known to be rewarding if held for short- to medium-term. “These stocks have to be held for a long period to accrue gains from them. They offer upside in tough times. But, with a pick-up in underlying demand, they are viewed as expensive stocks and tend to underperform the broader markets,” he adds. In addition, he points out that single-product dependent MNCs such as Colgate-Palmolive and Gillette could take longer to reward investors. Also, considering the current valuations, experts say taking fresh exposure to MNC stocks at this juncture may not be rewarding. "Wait for better entry points," they warn.