MNC-specific mutual funds in a bind

Mutual funds, with MNC-specific schemes, are facing an uncertain future, in the wake of a growing number of multinational companies opting to delist from the Indian markets.

There are three MNC-specific schemes in India "" the UTI MNC, the Kotak MNC and the Birla MNC scheme. All the three were able to give good returns, but the rising delisting offers by MNCs will reduce the number of listed companies and may raise a question mark on the future strategy of these schemes. 

NOT SO ROSY % return as on July 31, 2007
Scheme Name	1 Year	2 Years	3 Years	5 Years
Birla MNC	32.38	27.86	36.94	36.04
Kotak MNC	39.51	26.21	38.94	37.86
UTI MNC	34.55	25.39	35.17	33.41
Category  Average	35.48	26.48	37.02	35.77
Source: Value Research

These funds cannot invest in Indian companies till foreign companies acquire a stake in them. According to the stipulated mandate, these schemes can only generate returns by investing in securities of companies that have multinational parentage and where foreign share holding is significant.

There are about 60 companies, where the public shareholding is less than 25 per cent and another 22 companies where action in the form of buy-back, open offer or voluntary delisting can be expected in coming months. This includes companies such as BASF India, Castrol India, Mphasis Ltd, Matrix Labs, Henkel India, Ingersoll-Rand and Mysore Cements.

Indian markets have seen several blue chip exits in the past. This includes e-Serve (which was bought by Citigroup and it is now planning to sell the company at a much higher valuation), OTIS, Wartsila, Reckitt Benckiser, Ciba Speciality Chemicals, Philips, Aventis CorpScience, ITW Signote and Cadbury.

Analysts said that buybacks imply that the stock of a particular company has been largely undervalued over a period of time, and companies try to unleash greater shareholder value by making them exit at a premium.

Syngenta India scrip had closed at Rs 323.20 a share on January 2, 2007. Syngenta South Asia AG has acquired outstanding shares of Syngenta India at a price of Rs 730 a share. As a result, the public shareholding limit in the company has fallen below the minimum public shareholding limit.

"Our scheme has exposure to engineering, consumer goods and MNC pharma stocks, and has been largely benefitted by management buybacks happening in the consumer goods and FMCG space," said Swati Kulkarni, fund manager of UTI MNC.

MNC stocks are largely low beta stocks and they do not get hit by a market downside. At the same time, they don't rise sharply as is evident from the returns that these schemes have given.

The Bombay Stock Exchange (BSE) benchmark index, Sensex has risen by close to 45 per cent in one year as of July 31, 2007. However, these schemes have given an average return of 35.48 per cent.

Sometimes companies eventually go for delisting by continuous buybacks. A clutch of multinationals have expressed their desire to exit capital markets by acquiring shares from minority shareholders. This includes MICO, Bayer Diagnostics, iFlex, Mphasis BFL, ICI and Fulford India.

The MNC schemes of Kotak, Birla and UTI MF have holdings in many of these companies. "Parents of these companies find India an attractive market. Also, the potential for delisting in these companies and normal valuations have made us hold on to the stocks of these companies," said Nikunj Doshi, fund manager, Kotak MNC Scheme.

Others like Atlas Copco, Monsanto India and Timken India may go for delisting/buyback/open offer, according to an Edelweiss report.

"While the pie is small, there are still a handful of companies within this space. We hold shares of Bharti Airtel because Singapore Telecom has picked up a stake in the company and they have board representation too," said A Balasubramanium, chief investment officer of Birla Sunlife Mutual Fund.

All three schemes in this space were launched between1998-2000, a time when MNCs were doing very well. Now, fund watchers are sceptical about the viability of these schemes.

"These schemes were launched at a time when few MNCs were doing very well. Many MNC subsidiaries are now using delisting or open offers to move out of the listed space," said Sameer Kamdar, Country Head- Mutual Funds, Mata Securities.