April 2012 saw a delisting of one of the leading engineering companies, Alfa Laval, from Indian bourses. This Indian subsidiary of a Swedish MNC is best known for its expertise in creating the heat transfer, separation and fluid handling technologies which are used in areas such as food and water supply, energy, environmental protection and pharmaceuticals. The counter of Alfa Laval buzzed ever since the company announced its intent of delisting. Stock prices surged 34% since the process of reverse book building began on February 15, 2012. Similarly, a rare wealth creator in the Entertainment industry, UTV software, which is also an MNC, got delisted in India in March 2012. Igate Patni is another company which has also announced its plan of going off the record on stock exchanges. All these instances raise a question as to why MNCs are taking their India units private and more importantly whether MNCs have any special role to play in one’s portfolio. In this article we would analyse the journey of MNCs in India so far and whether mutual funds perceive MNCs as a good investment.
 

Alfa Laval - Steps towards Privatisation

Base: Rs 10,000
Data as on March 30, 2012
(Source: ACE MF; PersonalFN Research)

The Journey of MNCs in India
Post-Independence India adopted restrictive policies for foreign capital coming to India. Initially, the foreign capital was considered necessary to improve the technological competence and attaining self-sufficiency in heavy engineering sector. However, the restrictions were abolished in a phased manner. The Industrial policy of 1965 encouraged equity participation of multinational corporations in technical collaborations. The Foreign direct investment (FDI) was further boosted by offering tax sops, simplification of licensing procedure and de-reservation of a few industries such as fertiliser, aluminium, pharmaceuticals etc. With an aim to introduce reforms in order to increase competency and strengthen India’s foreign exchange position, government adopted partial liberalisation policies during 1980s. Many MNCs got listed in India during this time as the then policies became non-discriminatory for foreign direct investment in India. In 1991, India opened up its economy for greater FDI inflows by de-reserving few more sectors such as Banking, Telecom and Mining among others. Foreign Investment Promotion Board (FIPB) was established for attracting and facilitating FDI inflows. The government had permitted the use of foreign brand names for domestically manufactured goods. The foreign equity participation was raised to 51% for many industries. The policy framework and the investment environment have been progressive since then.

Investment in MNCs
MNCs operate across the globe through their subsidiary companies. They are usually preferred by investors for their efficient management, transparent operations, adherence to global standards and competent product offerings. Furthermore, MNCs pay higher dividends, as it is a source of sending share of profit back to the parent company. Sectors such as Pharma and FMCG have been dominated by the MNCs historically. Many MNCs have topped the preferred list of investors. Be it Colgate Palmolive or Hindustan Uniliver or a pharma company GlaxoSmithKline, most of them have become familiar names in India.

Performance of MNCs
Performance of MNCs has been steady but they collectively have failed to catch up with broader indices. The CNX MNC captures the movement of 15 companies on National Stock Exchange (NSE) where the foreign shareholding is in excess of 50% or the controlling stake is being held by the foreign company. The chart below shows that over the period of last 10 years CNX MNC has substantially underperformed the broader index BSE 200. Investment of Rs 10,000 in CNX MNC done on April 30, 2002 would have returned Rs 39,809 as on April 30, 2012. Similar investment done in BSE 200 on the same day would have grown to Rs 53,866 as on April 30, 2012. The major reason for such underperformance is that Hindustan Uniliver, the major constituent of CNX MNC, has remained flat and moved sideways for almost a decade hence it would be inappropriate to conclude that all MNCs have registered a similar performance.
 

CNX MNC vs. BSE 200

Base: Rs 10,000
Data as on April 30, 2012
(Source: ACE MF; PersonalFN Research)

MNCs and Mutual Funds
Given the sound corporate governance observed by MNCs and their strong footprint in the Indian market; mutual funds too went gung-ho on them. Some mutual fund houses launched thematic funds investing predominantly in MNCs. UTI Mutual Fund was the first fund house to launch a dedicated fund investing in MNC companies, back in October 1998. A year later, in December 1999, Birla Sun Life Mutual Fund launched a similar scheme on MNC theme. Since its inception, UTI MNC Fund has generated returns at 15.2% CAGR whereas Birla Sun Life MNC Fund managed to garner superior CAGR returns of 28.9% since its inception.
 

Performance of MNC Funds Vis-à-vis Performance of Diversified Equity Funds

Scheme Name	1 Year	2 Years	3 Years	5 Years	7 Years	10 Years	SD	Sharpe
Birla SL MNC (G)	7.0	11.5	33.9	13.4	19.1	22.3	5.54	0.40
UTI MNC (G)	11.8	14.5	31.6	14.6	17.9	20.0	5.03	0.40
Category Avg. of Diversified Equity Funds	-5.9	0.1	21.2	6.7	16.4	22.9	7.18	0.20
BSE-200	-9.6	-2.1	16.8	5.1	14.6	18.3	7.49	0.15

NAV as on April 30, 2012. Returns over 1-Yr are compounded annualised, (Source: ACE MF; PersonalFN Research)

Table above reveals that, both MNC funds have generated spectacular returns over last 3 years and have managed to beat the category average returns of diversified equity funds and also the BSE 200. Moreover, they have fared well across the timeframes and outpaced category average returns of diversified equity funds over 3, 5, 7 & 10 years. Furthermore, they have exhibited much lower volatility as compared to that of diversified equity funds and the BSE 200. The Standard deviation, which is a measure of risk, suggests that the MNC funds have been less risky and their higher Sharpe ratio denotes that the risk adjusted returns have been superior.

The table below is just an indicator of how mutual fund houses have heavily invested in some MNCs. We have listed herein only those MNCs which satisfy two criteria.
 

• The market value of the holdings should be highest among all MNC stocks the fund house holds under all its equity oriented schemes;
• Total market value of holdings in an MNC, under all the equity oriented funds of a particular fund house, is in excess of 1% of the total market capitalisation of that company.
   

MNC stocks in which Top 5 Fund Houses hold more than 1% of Total MCap

Mutual Fund House	MNC Name	Market Value *(Cr.)	MCAP** (Cr.)	% of Mcap
Reliance Mutual Fund	Maruti Suzuki India Ltd.	546.61	38976.86	1.40%
SBI Mutual Fund	Blue Dart Express Ltd.	209.17	4705.37	4.45%
HDFC Mutual Fund'	P&G Hygiene & Health Care Ltd.	168.07	7254.97	2.32%
UTI Mutual Fund	Akzo Nobel India Ltd.	147.36	2997.03	4.92%
ICICI Prudential Mutual Fund	VST Industries Ltd.	48.47	2249.66	2.15%

* Market Value of the investment of mutual funds; ** Mcap is the total market capitalisation of the company
(Data as on March 30, 2012)
(Source: ACE MF; PersonalFN Research)

Irrespective whether these fund houses have a thematic MNC fund; all of them have taken significant exposure in stocks where they sensed investment opportunity. For example, SBI mutual fund which doesn’t have any MNC fund; holds a meaningful stake in Blue Dart Express Ltd. On the other hand, UTI has a substantial exposure to Akzo Noble India Ltd. But its exposure to Akzo Noble under UTI MNC Fund is mere Rs 5.6 crore as on March 30, 2012. This indicates that it holds Akzo Noble across its schemes and investors who do not have invested in UTI MNC fund can still get exposure to it through other schemes of UTI mutual fund.

Road Ahead
We believe investors should not get carried away with the returns that MNC funds have generated so far. The superior performance of MNC funds, mainly attributes to the sectors in which majority of MNCs operate. Pharma and FMCG sectors have been the major wealth creators over last one decade and MNC dedicated funds have immensely benefited from their exposure to these sectors. Furthermore, there have been some quality offerings in the bouquet of MNCs beyond these sectors as some engineering companies too have rewarded long term investors.

In the recent times government has been working on a roadmap to encourage incremental FDI investments in India by opening up sectors such as multi brand retail for 100% foreign investment. One should not forget that the MNCs were forced to list their subsidiaries to do business in India in 80s. Now that they can invest upto 100% in most of the prominent sectors; they may skip the listing route. On the other hand, existing MNCs are considering delisting their business thanks to increasing compliance requirements and related costs. Once they are delisted; active trading in them ceases and shares of the company are not subject to any unrelated negative market sentiment. MNCs would get greater control and independence while doing business. It is evident from the fact that we frequently hear the news of delisting of MNCs these days but the new listing of MNCs is certainly a rare event. Standard Chartered IDR is the only listing we had in the recent past. On the other hand companies, where the promoter holds more than 75%; are considered as potential delisting candidates. Stocks of such companies have been buzzing for last 1 ½ years. Process of reverse book building which gives minority shareholders a better exit option actually works against the company in many cases. Take an example of Alfa Laval which had to pay exorbitant Rs 3,850 per share as against the floor price of Rs 2,045 and indicative delisting price of Rs 2,850 it had announced earlier. The list of potential delisting candidates is not short and all such MNC stocks are trading at expensive valuations as the prices have soared on the hopes of windfall gains that can be made on delisting. However, if the price that companies have to offer, become too high or practically unviable; then companies might work out some other options and in that case; stock prices would come off sharply if the rise had been unwarranted by the fundamentals.

Our View
We are of the opinion that there might be very few new listings of MNCs for the above said reasons. Pricey valuations and possibility of shrinking of MNC universe (owing to probable delisting) may result in ordinary performance of MNC funds which, till now has been superlative. However, some MNCs would continue to shine purely on their merits. To take exposure to them, you definitely don’t require an MNC Fund. The best example is SBI Mutual Fund (any other fund house for that matter), which, without having launched an MNC fund, has invested in Blue Dart Express - a potential delisting MNC candidate. The fund has already benefited from its investments in the company. Invest in an opportunities fund instead to benefit from any special situation that looks potentially rewarding. Fads fade with time and what precipitates is glory of old days. MNC funds might soon become the best example of this.

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