MNC selldowns

As multinational corporations capitalise on India's valuation premium, there are reasons for caution as well

I have been investing in the Indian markets for multiple decades. Throughout this time, we have consistently seen global companies continuously increase their stakes in their Indian operation. Multinational corporations (MNCs) have consistently looked for opportunities to increase their economic ownership or take their Indian subsidiaries fully private, either through mergers with private companies, stock buybacks, or preferential allotments. The higher the stakes, the better, with full ownership of the Indian business as the ultimate goal. Many increased their stakes at a premium to the then-prevailing market price, implicitly signalling that markets were underestimating the long-term prospects of their Indian business.

In the last 12 months, this pattern has changed. We now have numerous MNCs monetising their stakes and listing or selling part stakes in their Indian operations. Whirlpool, Timken, and ZF are examples of global MNCs selling down stakes and monetising their high valuations. Hyundai Motors is the most visible example of a global MNC playing valuation arbitrage and listing its Indian subsidiary. The sums being talked of are large even by global standards. Hyundai may raise over $3 billion, the largest initial public offering (IPO) in Indian history. Whirlpool raised nearly $500 million, selling down from 75 per cent to 51 per cent. The money is being raised to deleverage global balance sheets or to raise capital for investments into new areas like electric vehicles. According to bankers, this trend seems to be just beginning, and we may see many more MNC monetisation events over the coming months. Many more companies with large Indian businesses may follow Hyundai’s example. When you can list for a multiple of 20-25 times earnings in India compared to a price-to-earnings (PE) multiple of five in your home market, and you need equity capital, the temptation is obvious. You can raise a large amount of capital while still maintaining control of the local business by retaining majority ownership.

What should one make of this trend? Good? Shall we worry? Is it a sign of a top in the markets? First of all, this is a clear sign of the maturation and size of the Indian capital markets. India has a market capitalisation of over $5 trillion, the fourth-largest in the world. Average daily trading volumes have now surpassed those of Hong Kong. Less than five years ago, India had a weighting of only 10 per cent in the MSCI emerging market index, while China was near 40 per cent. Today, India is close to a 20 per cent weighting in the indices (second-highest), with China just ahead at 24 per cent. Any global equity mandate excluding the US has a 5 per cent India weighting. The country is no longer marginal. Our capital markets are one of a handful that can support a multibillion-dollar issuance.

Given that we have a $4 trillion gross domestic product (GDP) and a household savings rate of 20 per cent, these savings, restricted to Indian assets, are increasingly going into equities, making India a very favourable place to list. Even on an absolute basis, this is a very attractive and growing savings pool.

In a world where investors complain of closed IPO markets and a lack of listings, the Indian markets stand out in terms of receptivity to new listings. All types of companies across industries, business models and of differing maturity can list. We are seeing multiple IPOs and secondary sales every day. This vibrancy also strengthens the startup ecosystem as the ability for venture capital (VC) to exit via the capital markets is not questioned.

India is one of the few places in the world where a conventional car company can list at double-digit multiples and raise billions of dollars. Likewise, try raising 500 million dollars for a white goods company or auto ancillary in the West at anything higher than single-digit multiples. For older business models, India may be one of the few places you can list at reasonable valuations. Indian assets across sectors trade at significant valuation premiums to global peers. MNCs see the valuation arbitrage and are now beginning to take advantage of the differing growth and valuation expectations. They are using the India premium to their advantage.

Given the large flows coming into equities, which most expect to continue and further accelerate, the large IPO pipeline is actually a positive. It will ensure that the demand for equities is met with an adequate supply of, hopefully, quality paper. Otherwise, we would run the genuine risk of a potential bubble, as demand for equities swamps the supply of paper. A robust IPO market ensures that the money coming into equities can be used to finance business expansion rather than just driving secondary prices continuously higher. The regulator must ensure the quality and genuineness of the supply. Bubbles lead to capital misallocation and will eventually cause large retail losses.

Just as global companies are taking advantage of the premium multiples in India to monetise, Indian companies can also leverage these multiples for strategic purposes. They could create a secondary listing overseas, which trades off the local prices, and use that as currency for acquiring global assets or talent. With these multiples in India almost any acquisition anywhere else will be accretive.

One must, however, admit to some cause for pause as well. If the largest shareholder is selling, and by choice, why are we buying? Is this not similar to insider selling? What do I know about the long-term prospects of the company that the MNC seller does not? Normally, no one has a longer-term horizon or better understanding of prospects than the principal shareholder who also runs the company on a day-to-day basis. MNCs have historically always tried to increase stakes. Why the change today? Are valuations totally out of sync? Is this monetisation event their cheapest source of capital? Is it that the size of Indian businesses today is such that globally relevant monetisation events can occur in India? Is the market too optimistic about longer-term growth prospects? Whatever the reason, it is one more piece of data pointing to just how high valuations are in India today.

We are in a bull market, that much is clear. How long it lasts is anyone’s guess. What is apparent is that our markets are not going to correct in any serious way until domestic investors lose confidence. At the moment, there is absolutely no sign of that happening.

The writer is with Amansa Capital