MNC stock premiums double in five years, says Ambit

The valuation differential between home-grown companies and multinational ones (MNCs) listed in India has doubled in the past five years. Further broadening of premium is less likely, said domestic brokerage Ambit in a report.

The price to earnings ratio (P/E) of India’s 25 biggest MNC stocks vis-à-vis those on the BSE exchange's benchmark, the Sensex, doubled to 2.5 between FY10 and FY15.

Ambit says less than a third of the P/E expansion in MNC stocks can be attributed to earnings growth. Scarcity premium, prospects of delisting and ‘safety trade’ are the other factors resulting in an increase in valuations of these companies.

It cited the example of Colgate-Palmolive, the consumer goods major. “Over these five years, Colgate’s P/E rose to 49x in FY15 from 21x in FY10. Note that 21 per cent of this increase in P/E was attributable to earnings growth, whilst 75 per cent was attributable to the re-rating of the P/E multiple for the stock,” it said.

Scarcity premium, it said, was on account of the free float of MNC stock, due to high promoter holding. Ambit said investors perceived MNC stocks as ‘safety trade’ due to non-earnings-based factors such as superior capital allocation and cash generation or strong technological support from the MNC parent. Ambit also observed that prospects of delisting also play a role in the expansion of valuations for MNC stocks.

It, however, isn’t so sanguine on the MNC pack. “Over the next couple of years, the Indian economy should gain momentum. While MNCs will benefit, given the historical trends, this growth could be captured within unlisted subsidiaries at the cost of minority shareholders. Further, cross-country data suggests that as countries become richer, returns on equity decline in the face of rising competitive intensity. With risks on growth and corporate governance, a sustained rise of the ‘MNC premium’ is unlikely,” said Ambit analysts led by Saurabh Mukherjea, in a report titled 'Debunking the MNC premium'.

The Ambit report stated MNC stocks such as Kansai Nerolac, Crisil, Oracle Financials, GSK Pharma, GSK Consumer and Gujarat Pipavav scored highly in terms of safeguarding of minority interest.

The brokerage raised a red flag for ABB India, Alstom T&D and Siemens, “as their valuations are apparently disconnected to their earnings growth”.

Tough road ahead

MNCs have beaten benchmarks by a large margin in the past

CAGR (%)	1-year	3-year	5-year	10-year
BSE 500 Index	16	23	12	16
MNC universe	49	30	22	21
Source: Bloomberg, Ambit Capital research