The Phoren Fascination

Indian investors are always perceived to look favourably on MNCs when making their decisions.

But do MNCs perform better as a group and give better returns than the market in general ? A report.

Maybe it was those decades of isolation because of rigid customs and forex controls. But Indians have developed an abiding fascination for phoren goods. For years it was considered a major status symbol to sport something that didn't bear the Made in India logo. It did not really matter what the product was or whether it was of higher quality than the comparative Indian product.

Of course that fascination spilled over into the stock markets, where scrips with a foreign parentage have usually evoked great interest and got higher discounts. Oldtimers will remember the scramble for the Colgate scrip when the CCI allowed disinvestment at a record premium of Rs 25 bucks per share. Fera shares paid higher corporate taxes - they still do. Despite that liability, it was felt they gave better returns than the bulk of Indian companies.

 

They were always perceived as better run organisations and generally paying higher dividends since that was the only way to repatriate profits to their parents. There was also a scramble for all Fera company stocks when the 40 per cent limits on foreign holdings was removed. It was reckoned that all the shares would appreciate as the parents increased their stakes.

The controls have now been eased of course and promise to be eased further in the coming years. But the fascination with MNC stocks continues. What complicates the picture for an analyst is the recent occurrence of the reverse phenomenon. FIIs are showing an increasing interest in Indian stocks.

So there are now three categories of companies with large foreign equity holdings - the first being the Fera companies such as Hindustan Levers and ABB where the majority shareholder is a foreign parent. The second category features Indian companies with significant minority foreign equity participation from their majors - ITC is the most public example but there would be others such as Larsen and Toubro and Hindalco.

There are also some companies and institutions such as Reliance, HDFC, and Infosys which are completely Indian-managed but where FIIs have invested with great enthusiasm. This shows up in large foreign equity holdings. In this study, we have concentrated on the first two sets since the third category are really Indian companies perceived as being run professionally and possessing either global insulation or being internationally competitive rather than actually being MNCs.

The first thing we realised is that the market myth of better returns from MNCs is actually a self perpetuating truth. Because investors give higher discounts to MNC companies they do outperform the run of the mill desi stock as a class especially where capital gains is concerned. The larger blue chips also consistently pay very high dividends but since their going prices are high, yields tend to be fairly low anyway. So, its not worthwhile to pickup MNC scrips from the secondary markets as dividend plays.

Importantly, some Fera companies are no better than their Indian counterparts. Many MNCs have come here and suffered for years before they have successfully attuned to the Indian business environment. Even Carrier Aircon, Bausch & Lomb, TVS Suzuki and Indian Shaving Products which now look major success stories have all spent several years in the red. Whirlpool is currently very much in the doldrums, Proctor & Gamble is barely round the corner, that too after hiving off a lossmaking brand. All the liquor tieups are losing money in large quantities. When an MNC is doing the wrong things or conditions are inimical, it will take just as many lumps as any other business.

Now, stocks of different market caps usually return different performances and they also possess different levels of risk. Smaller stocks can grow in huge quantum jumps and they have less resources to tide over a recession. So, smaller caps always get hit harder in a bear market.

In the larger Indian context, for example, the 30-share BSE Sensex shows significantly different performances from the Allshares index of 3500 scrips listed on the BSE. Players in larger, more liquid scrips also usually have access to more leveraging via some carry-forward system. Exit options are also easier.

We decided that in order to study MNCs as a class from the angle of stock market returns, it made sense to split them into two categories and study those in relation to their comparable Indian counterparts. So, we created two indices. The Fera 100 index of the 100 largest MNCs whose performance could be compared to the market performance of the Allshares Index which tracks general market performance. This is not strictly avery valid comparison because the universe of one is far smaller than the other. But it is the closest we could get.

For a look at the big boys we created the MNC -Index of the 30 largest Fera companies. This set is composed of mainly household names and it has very different levels of performance from the Fera-100. It is more directly comparable to the Sensex with which it has certain scrips in common as well.

We looked at the relative performances over two separate timeframes. In each the MNC was compared to the Sensex and the Fera 100 to the allshares. Also the MNC was compared to the Fera 100 and the Sensex to the Allshares. This should tell us whether the bigger MNC stock seriously outperform the bulk of Fera scrips, as well as the Sensex. It also should indicate whether that level of performance is only to be expected from big scrips versus small scrips or whether big MNC scrips posses some magic formula.

One study was over the long timeframe of the last seven years starting January 1990 which we took as the base date for the MNC-Index and the Fera-100. It is also the Allshares base date so these three indices were all trading at around 100 points In January 1990. The Sensex was then trading at around 795 points.

The other timeframe was the very short period of the last four months. This ought to give us some pointers about the immediate behaviour of the MNC stocks and pointers as to their likely direction as well as the likely direction of the general market trend. All the indices have been normalised in this short timeframe to a base date of January 1 1997 when their prevailing values have been recalculated to 100 points. First the long timeframe.

The MNC versus the Sensex

The MNC index is composed of scrips such as HLL, ITC, ABB, Ashok Leyland, BBLI, Colgate, Siemens, Kirloskar Cummins, Glaxo, TVS Suzuki, Nestle etc. A total of seven scrips are common to the MNC -Index and the Sensex.

Since January 1990 the sensex has travelled from a base value of 795 points to a current value of 3559 points - a total gain of 347 per cent which annualises to approximately 30 per cent. It has hit an alltime high of 4643 points in September 1994 and dropped to interim lows of 1980 in April 1993 and 2713 in Decmeber 1997. The respective top and bottoms are 484 per cent and 149 per cent and 241 per cent.

Since January 1990, the MNC index has moved to a current value of 480 which is a 380 per cent gain for an annualised return of approximately 32 per cent and it has also hit an alltime high of 640 in September 1994 and interim lows of 300 and 383 in April 1993 and December 1996. That means the high achieved was 540 per cent off the base and the lows were respectively 200 per cent and 283 per cent up from January 1990. Conclusion - a clear case of significant out performance - big MNC stocks generally outperform the big stocks.

The MNC index versus the Fera 100 Index

The Fera Index has hit a current value of 361 points which is up 261 per cent since January 1990. It has hit an all time high of 490 points in September 1994 and interim lows of 225 and 305 in April 1993 and December 1996. Again, obviously the big MNC scrips out perform the bulk of fera scrips. The difference is of the order of 13.7 per cent annualised over this long period.

The Sensex versus the Allshares index

The Allshares has oscillated wildly in the past seven years.It is at a current value of 106 points which is less than one percent annualised. It hit an alltime high of 309 points in December 1994 - note the timing lag of three months behind the other three indices. It has hit an alltime low of 97 points in Decmeber 1996 and also an earlier low of 118 in April 1993.

The difference in order of performance between the Sensex and the Allshares is of the order of 29 per cent annualised. Thats' huge and it dwarfs the 13 per cent spread between big MNC and the Fera-100. The probable reason is that most MNC scrips even the smaller ones are at least mid cap sized. Whereas the bulk of the Allshares is made of small caps. Small caps have been hurt most in the last bear market. they have also been neglected in the last couple of bullruns by the FIIs who cannot afford to get stuck in illiquid investments. Hence the Fera -100 has handsomely out performed the Allshares. So another conclusion is that Fera shares are better investments than general Indian shares.

The short timeframe

The MNC versus the Sensex : In the last four months the Mncs have pulled up to a recent high of 116 per cent and are currently riding at 106 per cent of their January values. They have hit a low of 99.78 per cent in this period. The current trend appears to be showing a recovery after hitting a recent bottom at 101 per cent.

The Sensex in the same period has moved much more rewardingly for the general investor. it has gone to a high of 121 per cent after the Budget and dropped to a low of 99.75 per cent. It is currently trading at 109 per cent. The current trend in the Sensex is incidentally down. So the short term trend in these two indices appears slightly out of phase which is somewhat unusual.

The Fera-100 versus the Allshares

The Fera -100 has lifted to a recent high of 113 per cent and dropped to a low of 99.8 per cent in the last four months. It is currently placed at 104.5 per cent. The Allshares on the other hand is at a current value of 96.3 per cent versus its January 1997 values. It hit a recent high of 113 per cent before seeing a steep decline this week. The Fera-100 has thus outperformed the Allshares while underperforming the MNC-Index which has in turn been beaten by the Sensex.

Examining the short term, it appears that the Sensex is currently receiving a better discount that the MNC-Index. This could be because speculative activity is concentrated in the Index scrips. However the Fera -100 is still clearly beating the Allshares.

What are the general conclusions of this study. It appears that big MNC scrips in general get a better discount than the general run of pivotals -certainly in the long run. The 2 per cent spread between Sensex and MNC-index works out to very significant over a long timeframe yielding 33 per cent more in profits via capital gains. If one considered reinvesting dividends the returns are even better as the MNC-Index consists solely of high dividend payers and there is a small 0.5 per cent difference in yields in favour of the MNCs.

Smaller MNC scrips are definitely better than run of the mill scrips. However, they are not superior to the Sensex and it may make sense for a lazy operator to simply stick to Sensex pivotals rather than look for smaller Fera scrips. Here good research is essential because one TVS Suzuki or Carrier Aircon can make the difference between respectable and phenomenal returns.

In the short run, the Sensex appears to be outperforming everything but the weight of evidence is in favour of this anomaly being rectified in a longer timeframe. There has been no single period as long as 12 months when the big MNCs haven't had higher performances than the Sensex.