Should you focus on MNC stocks?

Despite the open offer by HUL and the expectation of other MNCs following suit, investors should be cautious and not buy into the hype. SANKET DHANORKAR

The open offer to buy back the shares of Hindustan Unilever (HUL) seems to have set tongues wagging, as suggested by the renewed clamour for MNC stocks. The share prices of many MNCs have moved up sharply in anticipation of more open offers. While HUL shares rallied by more than 20%, others like ColgatePalmolive, Nestle India, Procter & Gamble, and GSK Consumer also rallied over 5% in the hope of similar offers from foreign parents. Should investors lap up MNC stocks in the anticipation of more such offers or could these firms have other plans? What to expect? Until recently, most MNC stocks had been taking a beating because instead of making offers for delisting, as was expected, they were taking the offer for sale route and reducing promoter shareholding. This was to comply with Sebi’s June 2013 deadline on minimum public shareholding. The offer-for-sale approach involves the promoter offloading a part of his stake through the stock exchange. The stocks of companies that followed this route— Blue Dart Express, Honeywell Automation, Disa India and Fresenius Kabi Oncology—were thrashed by investors. While the investors were hoping to make a killing by tendering their shares at a substantial premium to market price, the companies were unwilling to pay through their nose to delist the Indian subsidiaries. Now, MNC stocks are back in favour in the hope of more open offers or share buybacks by foreign parents. However, the interest seems to be in MNCs in which the shareholding of foreign promoters is much less than 75%, and where the foreign parent has a strong balance sheet while its Indian arm is enjoying the profits. The Anglo-Dutch consumer goods maker, Unilever, has offered to buy an additional 22.52% stake in its Indian subsidiary, HUL, which would take its holding to just below 75%. Similarly, in November last year, UK-based GlaxoSmithKline Plc offered to buy another 31.8% stake in its Indian consumer products business to raise its stake to 72.5%. Why are foreign parents keen to hike their stakes in Indian subsidiaries? Experts believe they are simply looking for a bigger slice of the Indian pie and want to cash in on the consumption story playing out here. Many such Indian arms boast strong fundamentals and continue to do well even in a sluggish economy. The foreign parents want a bigger share of profits

Does this mean others will follow suit? Not many experts believe so. head. scope for the foreign parent to increase its stake. which is not cheap. research. Procter & Gamble Hygiene and Health Care and Agro Tech Foods as likely candidates for an open offer. Colgate-Palmolive. GSK Pharma and SKF India. Says Shah: “The valuation of many MNC stocks are quite high at current levels. Kotak Securities.” Pankaj Pandey. IDFC Institutional Equities believes that other listed FMCG firms with foreign parents are likely to follow in the footsteps of HUL and GSK. Those who had invested a year ago in the hope that MNCs would delist at any price to comply with the regulations have suffered losses. ICICI Securities. those who have held on to the stock through troubled times would do well to stick to it rather than sell. If one buys into such expectations. which have a promoter holdings of 50-60% and. BOC India and Saint Gobain Sekurit failed. Atlas Copco and Alfa Laval were successful. investors need to be cautious. However. hence. such as Bata India. While delisting offers by Patni Computer Systems. the stock is valued at around 34 times the 2014-15 earnings. says. “Unlike delisting. Nestle India. others disagree. At way of higher dividends. there is no such compulsion for MNCs to raise their holding up to 75%. where firms had to mandatorily comply with the public shareholding norms. each company has a different perspective. So. However. Dipen Shah. While the offer seems to be attractive.” Should HUL shareholders tender shares? Unilever’s offer to buy back the shares of Hindustan Unilever at 600 per share was at a 20. it carries a high level of risk. Exedy India. The investors who think the stock is overvalued and may slide after . with the company exhibiting stellar growth. HUL’s stock price trebled in the past five years. there is a possibility that other MNCs may not want to follow HUL and GSK. also does not see many offers coming through. others like Ricoh India. It lists Nestle India. The fact that Unilever is willing to spend so much to raise its stake in the Indian subsidiary implies that the company’s prospects are bright.6% premium to the closing price of the previous trading day. After a prolonged lull.” Instead of looking at possible open offer candidates. They should not consider only the premium. head. Colgate-Palmolive India.” says Pandey. There are many MNCs. “It depends a lot on the financial capability of the parent firm and not many companies would want to spend so much cash. private client group research. However. investors should pick quality MNC firms and stay invested for the long term. Cummins India. Affirms Pandey: “Investors would do well to hold on to quality MNC stocks as there is a paucity of such names in the market.

900—28% premium to the closing price on the previous trading day —were caught on the wrong foot as the shares have continued to rally after the offer. Investors should also consider the tax liability. . Those who tendered their shares at 3. The income will be taxed at the applicable slab rate if shares have been held for less than a year. the premium offered by Unilever may not do justice to HUL’s long-term growth prospects. if held for more than a year. Similarly.the open offer should look at GSK’s offer. you get indexation benefit.