Parent firms bullish, yet MNC stocks going cheap

In contrast to local companies with their iffy performance, multinational companies committed to India could be a better choice for investors to put their money in.

Some of the top-ranking listed Indian arms of MNCs still offer good prospects of medium term returns, especially those that are gradually increasing their parents’ holdings – some of them may eventually go in for delisting.

Among potentially promising stocks are Hindustan Unilever, ABB, Cummins India, Glaxo, Castrol, Siemens, Maruti Suzuki and Colgate Palmolive. In the second league are multinationals like SKF India, Fag Bearings India, Grindwell Norton, Ingersoll-Rand (India), Vesuvius India, Elantas Beck India and Goodyear India.

Nifty touched a high of 6,347 last week before slipping back to 6,260. But in nearly six years, NSE’s MNC index is up 36 per cent. In calendar 2012 Nifty gained 27 per cent; its MNC index gave 28.29 per cent returns. This year has been an exception — Nifty is up 6.01 per cent and the MNC index is up just 2.88 per cent.

This presents an opportunity to buy MNC shares.

According to Axis Capital, the confidence of Indian entrepreneurs in putting money in capex and manufacturing will come once the rupee stabilises. But MNCs still have the willingness to put money in India.

Many believe this is the right time to back MNC stocks because of policy decisions and the state of the global environment, worried as it is over the continuation of the easy money policy in the US.

According to brokerage Sushil Finance, there are several technologically sound and innovative MNCs with strong parentage which are fully committed to India and provides continuous support to its Indian operations in terms of technology, systems, processes, products,etc.

The list of firms identified by the brokerage are SKF India, Fag Bearings India, Grindwell Norton, Ingersoll-Rand (India), Vesuvius India, Elantas Beck India and Goodyear India.

SKF Bearings is the biggest bearings firm in India with a market-cap of Rs 3,383 crore, next comes Fag Bearings (m-cap Rs 2,531 crore). In abrasives, Grindwell Norton, the market leader, has an m-cap of Rs 1,462 crore; Ingersoll-Rand (India), market leader in air-compressors, has an m-cap of Rs 1,134 crore. Vesuvius India supplies to OEMs and has an with m-cap of Rs 871 crore. Elantas Beck India (m-cap Rs 371 crore) and Goodyear India (m-cap Rs 848 crore) are the other promising MNC arms.

They are zero-debt firms with robust balance sheets, decent cash flows, strong returns ratios, handsome dividend payouts and export potential, the brokerage says.

There are also royalty payment issues, which Espirito Santo Securities, another broker, highlighted among the corporate governance issues in a recent report.

The 25 highest royalty-paying companies together paid Rs 4,950 crore in 1012-13 to parent companies, up 23.8 per cent from the year before. This was well in excess of the average growth in net sales and profits (15 per cent and 13.1 per cent, respectively).

The top five highest royalty payers remained unchanged: Maruti Suzuki, Hindustan Unilever, Nestle, Bosch and ABB. Maruti continued to pay the highest royalty, 5.8 per cent of net sales and 102.6 per cent of PAT, Pauson-Ellis wrote.

Despite a perception of superior corporate governance in listed subsidiaries of MNCs, there are some serious misalignments in incentives between minority shareholders and the parent companies; prime among them is the rise in royalty rates since December 2009, when India liberalised the payment for foreign technology collaborations and royalty fees, making MNC promoters free to charge any amount as royalty to their Indian subsidiaries, according to Espirito Santo Securities.

The second- rung MNCs listed by Sushil Finance can be a better choice for investors than the big MNCs. “It is advisable for investors to accumulate these stocks on every dip… At current the market price we like: Grindwell Norton, Vesuvius India and Elantas Beck India. We also believe that SKF India and Fag Bearings India will be the first ones to benefit from the expected economic revival which will give boost to both its automotive and industrial segments and hence can be looked at on every dips,” Jain of Sushil Finance said.

From: http://www.mydigitalfc.com/stock-market/parent-firms-bullish-yet-mnc-stocks-going-cheap-358