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Bears Come Calling
It took an announcement of a share buyback by Reckitt Benckiser this March to resurrect the fortunes of its scrip. After the proposal for buying back 49 per cent of the public holding at Rs 250 per share, the scrip, which had been stuck in the Rs 160-190 range for the previous nine months, shot up to Rs 240. But Reckitt was lucky; most multinational company stocks were down in the dumps till early this year despite the general swadeshi brigade-induced feeling that the country is being bought over by the giant corporations!
In fact, quite the contrary has happened. The attraction of MNC stocks, the traditional movers and shakers of the stockmarkets with their high share premia, robust performance and professional management, has eroded steadily. Their combined market capitalisation (if you exclude itc and Hindustan Lever) account for Rs 47,291.6 crore or 7.8 per cent of the total market capitalisation—down from 10.9 per cent in 1999. And this, despite the shoring up of some stock prices with buyback offers. In most of these companies, promoter holding tends to be high (51 per cent or more). Assuming an average public holding of 40 per cent, MNCs would need only about Rs 19,000 crore to delist from Indian bourses.
So why did the magic wear off? There are five major reasons for the fall from grace. First and foremost, technology. "In the last 2-3 years, Indian IT and telecom stocks have not only provided earnings growth but also created wealth," says Motilal Oswal of Mumbai-based brokers Motilal Oswal Securities. Since MNCs, except for ITC and Hindustan Lever, weren't able to match the performance, the spotlight shifted away. For instance, compared to the cumulative average growth rate (CAGR) in net profit and sales growth of Infosys at 85.0 per cent and 79.6 per cent respectively during 1997-2002, GlaxoSmithkline, the top pharmaceutical MNC in India, achieved just 1.7 per cent and 12 per cent respectively. "The premium enjoyed by MNC stocks over and above Indian stocks is now gone," says Vetri Subramanian, head, Equity Fund, Kotak Mahindra Mutual Fund.
Secondly, while much of the performance of Indian companies has been possible due to their proactive approach, MNCs have been rather inert. "In the last few years, MNCs did not enter new markets or launch new products," says T.P. Raman, CEO, Sundaram Newton AMC. The fast moving consumer goods (FMCG) sector, dominated by MNCs, also did not do well in the past 2-3 years. Nor were the MNCs able to buck industry trends.
"Retail investors want low-priced stocks and MNC stocks have traditionally been high priced," says Oswal. With less-than-impressive earnings growth, these were obviously not value for money and therefore, prices tumbled. In the last five years, price corrections have taken place in stocks not performing up to market expectations. As Subramanian says, "While Indian companies got re-rated earlier, this happened only in the last 2-3 years to MNC stocks."
MNC stocks also didn't have the potential to provide the kind of capital gains small investors could have from mid-cap or small-cap stocks. Interest was restricted even for institutional investors since most MNC stocks have a low floating stock (the amount of shares available in the market for trading). For example, Birla 3M and Monsanto have a public float of 12.3 per cent and 23.3 per cent respectively. Then there is the problem of limited trading volumes. Birla 3M and Monsanto have witnessed an average monthly trading of 29,000 and 45,000 shares respectively in the last five years. "Going by the volumes, these stocks were over-owned by individuals and institutions," adds Raman.
Finally, MNC stocks were also influenced by developments in parent companies. Global mergers like that of Glaxo and Smithkline in 2001 necessitated new plans for the global markets. Merged entities took time to settle down in their new forms. Says Raman: "There was a time when people bought MNC shares like those of Colgate and passed it on to the next generation." But Indian investors today want performance from their stocks, and fast. Clearly, unless history repeats itself, investors will remain cool to MNC stocks.