Special Feature     12-Feb-19
Stocks: Tried, tested and cheapStocks
MNCs have clean balance sheets, do not pledge shares and have stable dividiend policy. Several are off 20% from their annual highs
Related Tables
 Helping hand
 Superior returns
 Enjoying an edge
 Low-hanging fruits

The track record of promoters is a crucial criterion to pick stocks. Exposure to companies operating in a flourishing industry is not likely to deliver if the management has a dubious past and is incompetent. On the contrary, able owners can steer their ship to safe harbor even during turbulent weather. The ideal combination is good managers in a flourishing industry.

Investors hand over their money to companies to create wealth. As the business progresses, the market share increases, profit is generated and the market value of the firm appreciates. In the entire process, the key word is trust.

Going by hindsight wisdom, it is evident that several companies change their business profiles radically over the long term. It could be a natural progression due to changes in technology or tastes. The key takeaway is that even if the complexion of an enterprise changes significantly, the promoters remain the same.

Though stability at the top does not matter for the short-term investors, it is important for those who want to stay invested in the company. Taking a call on promoters is subjective. Every company has a history of sparkling performance and dark patches of governance issues and financial stumbles.

Against this backdrop, multinational companies (MNCs) stand out. They bring to the table several advantages. One of the major being globally tried and tested products and services that might require some localization at marginal cost. The typical learning curve almost does not apply to them as their parents have experience in operating in different geographies.

Apart from market insights and understanding, MNCs also enjoy a huge edge of advanced technology, known brands and marketing skills. Even while the domestic manufacturing base is being established, high-end products can be imported from the parent. Their outgo on research is lower compared with indigenous competitors due to access to the latest developments in the field from parent. They have huge cash cache that supports them while they establish themselves. There are instances of parents committing long-term and unconditional support to their Indian counterparts in challenging times (see box: Helping hand).

In fact, several MNCs operating in India are respected for their innovations. Tyre manufacturer and marketer Goodyear introduced tubeless tyres in the Indian market. Hindustan Unilever (HUL) is a pioneer in the domestic fast moving consumer goods (FMCG) market, with several differentiating products in its portfolio.

Goodyear was incorporated in the calendar year (CY) 1961 and HUL in CY 1933. They are in India for many decades. So are several other MNCs in various market segments. Thus, vintage is another factor that provide significant comfort to investors These companies have seen economic and business cycles and learned hard lessons of survival.

MNCs prefer to stay clear of aggressive debt-funded expansion. The parent does not have to pledge its shares to raise funds. They have clean balance sheets. So there are no big shocks and surprises from them. They have predictable and stable dividend policies.

MNCs are RoE (return on equity) champions. Many have reported RoE in excess of 50% in the latest financial year. These include Castrol India, HUL and Procter & Gamble Hygiene and Health Care. Several of them have managed the delivery on account of an asset-light strategy. Pharmaceutical producer Novartis does not have own manufacturing in India. The company meets its requirement from local vendors. Suppliers and third-party vendors go through a rigorous approval process based on global guidelines and undergo audit scrutiny. Thus, the MNC enjoys operational flexibility and saves on capital as well.

The outsourcing-oriented business model has resulted in some MNCs with negative working capital. In short, each and every penny is deployed for productive purposes. Also, visible brands ensure premium pricing. All these contribute to superior returns.

Yet, investors have to be ready to overcome multiple challenges while picking MNCs. These companies face geographical restrictions. The Indian units have to operate in India as well as certain neighboring countries such as Nepal, Bangladesh and Sri Lanka, impairing the growth potential. The Indian associate or subsidiary has to pay royalty and technical know-how fees to the parent.

MNCs tend to have a simple organizational structure. The number of subsidiaries and associates is limited, enabling to understand the business. However, some have indulged in frequent restructuring involving multiple group companies — listed and unlisted — operating in India, unnerving minority shareholders. One of the oldest MNCs in India making electric and energy products has merged certain businesses with itself only to de-merge them again a few years later. A few MNC parents function through multiple subsidiaries and associate companies, giving rise to conflict of interest and related-party transactions. Resources of the listed entity are deployed to benefit the unlisted companies.

MNCs are known to opt for de-listing out of the blue. Many have done so by handing a raw deal to the minority shareholders by buying shares back at steeply discounted prices. Several MNCs share limited information. In addition, research coverage of some is limited. The peculiarity is particularly noticeable in Indian subsidiaries of giants. They seldom require funds and have little interest in keeping the market informed.

The S&P BSE Sensex is merely 6.6% from its all-time high of 38,989. The lead index is not reflecting ground reality as it is being driven by a handful of index heavyweights. Small and mid caps have destroyed investors' wealth. The S&P BSE Mid-Cap index is off 26.2% and the S&P BSe Small-Cap indices is away 46.4% from their historical highs. The BSE 500 index has to regain 11.2% to reclaim lost territory. These divergent movements among large-, mid- and small-cap indices represent anomalies in valuation. Therefore, the present time is opportune to focus on MNCs that have witnessed a healthy correction. They are appropriate investment avenues for risk-averse investors. These companies are stable and maintain their dividend payout, blunting their slow capital appreciation.

Capital Market shortlisted MNCs reporting 20% or more correction from their 52-week highs. Those with mutual fund holdings were preferred. Companies that are subsidiaries of overseas firms were considered. Also, associates and joint ventures were taken into account and so also those with Indian partners.

Country's largest passenger-car manufacturer Maruti Suzuki plunged to a 52-week low in January 2019 mainly owing to poor performance. Sales volumes slid 0.60% in the third quarter ended December 2018 but increased 6.5% in the nine months ended December 2018. The passenger-car industry is expected to underperform compared with the projected growth of 8-10% for the fiscal year ending March 2019 (FY 2019), as predicted by the Society of Indian Automobile Manufacturers. Factors affecting the performance include higher commodity prices, adverse foreign exchange rates, rise in marketing and sales expenditure and the steep increase in the costs of resources and capacities planned earlier to keep up with the estimated growth. In near future, market conditions are likely to remain challenging.

The seller of almost one out of two passenger cars in the country aims to achieve annual sales of two million cars from FY 2020 and to three million cars a year by FY 2025. Parent Japan-based Suzuki Motors Corporation controls 56.21% equity stake. The first line of production at the Gujarat plant, under a contract manufacturing arrangement with the parent, has commenced. The second line will go on stream early CY 2019. Work has started on the third line and is expected to be operational beginning CY 2020. A significant portion of the revenues is derived from the semi-urban and rural parts of the country, with coverage of around 1659 cities.

Huhtamaki PPL, formally Paper Products and incorporated in 1950, became member of Huhtamaki Packaging Worldwide, the Finnish consumer-packaging major, in CY 1999. The parent, founded in CY 1920, is a global specialist in packaging for food and drink, notching revenues of three billion euros in CY 2017. The promoters owned 66.94% of the equity capital end December 2018.

A 51% stake was acquired in Webtech, the Indian manufacturer of labels for the pharmaceuticals sector, in CY 2012 and 100% equity in Positive Packaging India in January 2015. The portfolio includes flexible packaging including a variety of pouching solutions, labeling technologies, shrink sleeve solutions, specialized cartons, packaging machines, tube laminates, promotional, holographic and security solutions, cylinders and specialized films for high barrier. Major clients are Britannia, Coca Cola, Ferrero, Glaxo Smithkline, Marico, Mondelez, Nestle, Pepsico, P&G and Unilever.

Among the major headwinds, the Maharashtra Pollution Control Board in November 2018 has directed closure of the Thane unit under the Water (Prevention & Control Pollution) Act, 1974; the Air (Prevention & Control Pollution) Act, 1981; and the Hazardous & Other Waste (Management & Transboundary Movement) Rules, 2016. A writ petition has been filed in the Bombay High Court to set aside the closure orders. To ensure continuity of supplies to customers, customer orders could be diverted to other plants across the country.

Blue Dart Express is South Asia's premier express air and integrated transportation and distribution services provider. Delivery of consignments is offered to over 35,000 locations in the country with coverage of over 15,000 pin codes. Being part of Deutsche Post DHL Group gives accesses to the largest express and logistics network worldwide, covering over 220 countries and territories, and to an entire spectrum of distribution services including air express, freight forwarding, supply chain solutions and customs clearance. Deutsche Post DHL Group, with revenues of 60.44 billion euros in CY 2017, is an express and logistics services provider, with over five lakh employees. The group holds 75% shares of Blue Dart.

Over 19.59 crore domestic shipments and over 9.15 lakh international shipments weighing more than 696,961tonnes were undertaken in FY 2018. The plan is to further strengthen and consolidate air and ground infrastructure and expand reach. Blue Dart Aviation, a subsidiary, is operating for over 22 years. The sole domestic freighter operator with scheduled flights offers air services through a fleet of six Boeing 757–200 and has a capacity of 500 tonnes per night in the seven major cities.

With 40 years of experience, Ineos Styrolution India is the largest producer of absolac (ABS) and absolan (San) in India. ABS is a plastic resin used to manufacture home appliances, automobiles, consumer durables and machinery, while San is a polymerized plastic resin mainly used for products such as lighting, stationery, novelties, refrigerators and cosmetic packing. The automobile segment is facing a slowdown since August 2018, adversely affecting revenues and volumes. Mutual funds held 5.94% equity end December 2018. The balance-sheet leverage is moderate, with a debt-to-equity ratio of 0.25 end March 2018.

The Indian unit's capital expenditure plans of Rs 130 crore involve capacity expansion of the specialty ABS segment. Fresh capacities are likely to go on stream by June 2019. Parent Ineos Styrolution is a global styrenics supplier, offering 1500 products, and has over 85 years of experience. The parent reported revenues of 5.5 billion euros in CY 2017 and operates 18 production sites in nine countries.

Ingersoll-Rand (India) is operating in India for almost a century. The maker of industrial air compressors of various capacities and provides related services to industries such as automotive, metals, pharmaceuticals and textiles. Exports go to American, Asian and European countries and accounted for 20.5% of the revenues in FY 2018. A record one-time special dividend of Rs 202 per share (face value of Rs 10) was paid in May 2018 on completion of 40 years of public listing in India. Considering the price at the time of announcement, the stock provided a hefty dividend yield of around 28%.

Incorporated in Ireland, the 145-year-old parent Ingersoll-Rand operates in segments such as compressed air and gas systems, power tools, lifting and material handling, club cars, transport temperature control systems, solutions for indoor environments and fluid management products in industrial operations. Revenues of the NYSE-listed company were US$ 15.7 billion in CY 2018. The parent holds 74% equity stake in the debt-free Indian unit.

Kokuyo Camlin is one of the oldest players in the stationery segment in the country. Flagship brands are Camel and Camlin. The product range includes stationery material for art, scholastic, school stationery and general stationery products. Leading Japanese stationery manufacturer Kokuyo Company (revenues of US$ 3 billion in CY 2017) acquired controlling stake in CY 2011.

The focus is on new product launches. Innovative products such as brush pen and heavy body acrylic colors were launched in FY 2018. Also, products in categories like pens and notebooks were introduced to strengthen market presence. The marketing network consists of 1,500 dealers and distributors supplying products to over three lakh retailers across the country. Increasing competition from China remains a major challenge in the high-volume, low-margin business.

The Patalganga plant in Mahrashtra, which went commercial in April 2017, is one of the largest stationery plants of the Kokuyo group. Built at a cost of Rs 100 crore, the facility is fully operational and manufactures over 200 stock-keeping units and is expected to provide benefits of economies of scale. New technology from the parent has also been incorporated in the new plant.

Whirlpool of India has three home-appliance manufacturing facilities at Faridabad in Punjab, Union Territory Pondicherry and Pune in Maharashtra. The product portfolio includes refrigerators, washing machines, air conditioners, microwave ovens and small appliances. Also, product development and procurement services are offered to the parent and other group companies. The service network is spread across 3500 cities and towns.

Inroads are being made into the hitherto untapped African markets including South Africa and Morocco. Exports go to several other markets such as Philippines, Srilanka, Bangladesh and Nepal. A liaison office was set up in Nepal in FY 2018. Mutual funds owned 8.34% equity share capital end December 2018 in the debt-free company.

The century-old US-based Whirlpool Corporation has 75% stake in the Indian unit. The parent operates in 170 countries with 70 manufacturing and technology centers.

Established in 1984, Johnson Controls-Hitachi Air Conditioning India is one of the top three players in the Indian air conditioning market. The aim is to become number one heating, ventilation and air conditioning (HVAC) manufacturer in India by FY 2021 along with increase in market share in both the business-to-consumer and business-to-business segments. A wide range of air conditioning solutions and products are on offer for homes, offices and retail establishments. Products are distributed through a network of 9,698 trade partners and retailers across 1,358 cities and towns.

Significant investments have been made in marketing and promotions of air-conditioning products. The thrust is on enhancing reach in tier II and tier III cities and south India markets. Institutional presence is high, with mutual funds holding 11.36% equity end December 2016 in the debt-free company. Promoters owned 74.25% share capital.

The parent is a joint-venture between US-based Johnson Controls, controlling 60% equity, and Japan-based Hitachi Appliances, owning 40% stake. Both have over 100 years of history and command leadership position in the HVAC segment.

Incorporated in 1992, Gujarat Pipavav Port operates India's first private sector port at Pipavav in Gujarat). The all-weather port is located around 152 nautical miles north-west of Mumbai. The port connects India with the Far East, Middle East, Africa, Europe and the US. Container handling capacity is 1.35 million twenty-foot equivalent unit. The bulk cargo capacity is four to five million tonnes per annum (mtpa), depending on the cargo mix. The liquid cargo capacity is about two mtpa. The container berth is used for handling the roll-on / roll-off vessels. Also, marine, material-handling and storage operation services are offered.

A 30-year concession agreement was entered into with the Gujarat government and Gujarat Maritime Board in September 1998. The debt-free, cash-rich company holds 38.8% shares in Pipavav Railway Corporation that constructs, operates and maintains a railway line connecting the port of Pipavav to Surendranagar of Western Railway in Gujarat.

Promoter APM Terminals, with 43.01% stake, operates a global terminal network of 22,000 professionals serving 74 port and terminal facilities and 117 inland services operations in 58 countries. Port management and operation services are provided to shipping companies.

Capital goods maker ABB India has served utility and industry customers for over six decades with a range of engineering, products, solutions and services in the areas of automation and power technology. The technology leader in electrification products, robotics and motion, industrial automation and power grids caters to customers in utilities, industrials, transport and infrastructure. As many as 47 manufacturing units are operated across nine locations and 22 sales and marketing offices across India. Exports go to over 100 countries.

Power grids contributed 40%, followed by electrification products 25%, robotics and motion 20% and industrial automation 15% to the revenues in CY 2017. Mutual funds held 6.89% equity share capital in the debt-free company end December 2018.

Parent Switzerland-headquartered ABB is among the top 500 global companies, with revenues of US$ 34 billion in CY 2017. There is presence in the areas of robotics, power, heavy electrical equipment and automation technology.

Conclusion

Certain MNCs have reported a sharp recovery in recent months, while many are still struggling. There could be industry- or company-specific factors influencing the diverse trend. Many MNCs are thinly traded, thereby hampering price discovery.

MNCs tend to comment premium valuation. Hence, small investors prefer to stay away from them. Some of them have plunged to 52-week lows in recent times, presenting an opportunity to handpick quality stocks at lower valuation. With their stable dividend policies and limited balance-sheet leverage, they are safe bets for risk-averse investors.

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