MNC stocks lose their premium valuation

There has been a steady decline in PE multiples of listed MNCs in the past two years

There has been a steady decline in the valuation of listed multinational companies (MNCs) in the last two years even as the broader market has become expensive. 

A typical MNC is now trading at 47.5x its trailing 12 month net profit, down from 51x at the end of 2014-15. In the same period, the price to earnings multiple of the broader market, excluding financial companies and government-owned oil companies, is up from 27x to 30x.

Listed MNCs in India continue to be traded at a large premium to their global parents but the premium has shrunk in the last two years as valuations in the global market have grown faster than in India. In the last two years, the price to earnings multiple of global MNCs in our sample is nearly 350 basis points higher. (see chart)

Analysts attribute this to the slowdown in India, which has made it tougher for MNC subsidiaries to beat their parents. Maruti Suzuki is an exception that continues to do well despite a tough external environment. “Corporate earnings in India have worsened in the last two years as they improved in Europe and North America. This is reflecting in the decline in the valuation premium that Indian subsidiaries enjoy over their parents,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

The combined revenue of the 23 top listed MNCs has been flat in last three years at around $30 billion. Excluding Maruti Suzuki, the combined revenue of MNCs in the sample is down by around $2 billion since 2014-15 to $20 billion in 2016-17. 

Companies that have reported declines in revenue in dollar terms include Hindustan Unilever, Siemens India, BASF India, Colgate Palmolive India, Nestle India, Bayer Crop Science, United Spirits, GSK Pharma, GSK Consumer, ACC and Ambuja Cement.

The analysis is based on the listed MNCs that are part of the BSE 200 Index. The sample excludes MNC subsidiaries such as Bosch India and Bata India, whose global parents are not listed. It also excludes companies such as Castrol India and Oracle Financial Services, whose businesses are not comparable with those of their parents. 

The broader market in India includes the common set of companies from the BSE 500, BSE mid-cap and BSE small cap indices.

Prominent MNCs in our sample include Unilever, Procter & Gamble, Nestle, Suzuki, Bayer, BASF, Lafarge Holcim (ACC and Ambuja Cement in India), SKF, Diageo (United Spirits in India), Colgate-Palmolive and Cummins.

The Indian subsidiaries of 23 MNCs in our sample have a combined market capitalisation of  $125 billion against their parents’ combined market value of $1.44 trillion. These subsidiaries accounted for 3.9 per cent and 4.2 per cent of the global revenue and net profit, respectively, of these MNCs in dollar terms at the end of 2016-17.

Others attribute the poor showing of listed MNCs to their parents’ decision to launch newer products through wholly owned unlisted subsidiaries. “With liberalisation of norms, several MNCs are now introducing new products through 100 per cent subsidiaries rather than through listed companies. MNCs are mostly present in FMCG, pharmaceuticals and industrials. The FMCG segment is seeing a surge in competition from Indian players such as Dabur, Patanjali and Marico. Besides, growth and margins are under pressure due to rural distress,” said AK Prabhakar, head of research at IDBI Capital.

In pharmaceuticals, price control and regulations have hurt margins and growth.

“Several MNC stocks did well before Indian equities started rallying in 2014. These firms were seen as a safe haven. Expectations were also high that several of these firms would be delisted. As the Indian market started rallying, these stocks took a backseat as investors turned to domestic firms,” said Rakesh Arora, managing partner, Go India Advisors, and former head of research at Macquarie Capital Securities.