Ownership Shouldnt Matter

Around this timMultinational companies have enjoyed premium valuations over comparable Indian firms historically. This was primarily due to differences in corporate governance practices in these two groups. Over the past few years corporate governance has improved in several Indian companies. Many of them have become more investor friendly and have taken active steps to focus on core competencies.

They are increasingly focussing more on metrics like return on capital employed which was hardly the focus earlier. Also, they are becoming more transparent. And this change has started showing in their share price and the stocks have gained substantially in terms of market capitalisation.

 

On the other hand, several MNCs have shown disappointing performance. There are concerns about transfer pricing, alternate arms of the parent, delisting and so on. Once again the market has responded by lowering the price-earning multiples for such companies. Because of these two factors, the distinction between MNCs and Indian companies has blurred.

In my opinion, being an MNC company or an Indian company is not relevant any more. More important is whether it is a good or a bad company.

I expect something similar to happen between the public sector and private sector companies over the next few years. In future investors will clearly distinguish between good and bad companies more and not between public and private ownership as much.

There are several factors at work that should drive this. The first is the privatisation of these firms and the changes in management, which should accompany privatisation. The second is the realisation by investors that in a number of cases, PSUs are well run companies and enjoy strong competitive advantages. Also in case of PSUs the risks of unrelated diversification and loose accounting practices is far less than in some private companies. Third and most important, PSU managements are more empowered today and are more proactive and sensitive to market capitalisation today than in the past.

(The authour is chief investment officer, Zurich India Mutual Fund)