We have all been very familiar with Multinational Companies
(MNCs) like Nestle, ITC, Unilever, etc., who operate in several countries,
including India. Normally MNC’s are bound by the strictures of the parent
company in terms of business practices, corporate governance and other related
issues. While they derive majority of their revenues in a parent location, the
idea is to spread far and wide in as many markets as possible and claim market
share. Hence, over a period of time revenues generated outside their mother
territory may outstrip the rest of the world. A good example is that of the Las
Vegas (U.S. based), Sands Corporation, which generates bulk of its revenues
from outside the U.S., in Macau, though it is based in America and is
considered an American stock. Another example is that of Techtronic Industries,
which is based in Hong Kong, but derives bulk of its revenues from the U.S.
through selling power tools via Home Depot.
From a fund management perspective, investing in MNCs that
derive more and more revenues from emerging markets than home markets can
mitigate political and currency risks that are normally associated with direct investments.
According to one study, emerging market operations of MNCs have delivered
significant revenue and profit growth compared to home markets. Almost all big
multinationals, including Apple, BMW, Prada, etc., are now betting more on
their emerging market exposure than home market exposure. Hence, it is not
surprising to spot these big names in all emerging markets, including India.
Extending this analogy, it may be
interesting to examine how many of the Indian companies have ventured outside
India, the so-called Indian Multinationals (IMNCs)! Typically, these would be
companies that generate a majority of their revenues outside India. We could
identify 10 companies among the 30 companies represented in the Sensex. The top
three names belong to the IT sector, which by the very nature of their business
models, serve clients outside India. This explains the heavy dependence on
offshore markets by the IT majors. Together, they also account for a
significant share of the Sensex at 18%. It is also interesting to note names
from Auto, Pharma, Petrochemicals and Steel. Although it is common sense to
assume that IMNC’s would be predominantly be owned by Indian groups, in cases
where foreign ownership is high, it fully explained by FII ownership, which are
entities that generally have their interests of investment at the forefront. Barring
a few (Tata Steel, and Hindalco) all others have enjoyed good performance in
the stock market.
Company
|
Business Sector
|
% Revenue
outside India
|
3-year CAGR (Share price) %
|
% share in overall Market cap
|
FII Ownership % June 2014
|
Foreign
Promoter % June 2014
|
Total Foreign Ownership% June 2014
|
Infosys
|
IT Services & Consulting
|
97
|
6
|
4
|
41.58
|
41.58
|
|
TCS
|
IT Services & Consulting
|
93
|
29
|
11
|
16.11
|
16.11
|
|
Wipro
|
IT Services & Consulting
|
89
|
14
|
3
|
9.40
|
9.40
|
|
TATA Motors
|
Auto & Truck Manufacturers
|
85
|
29
|
3
|
27.52
|
27.52
|
|
Dr Reddy
|
Generic & Specialty Pharmaceuticals
|
83
|
19
|
1
|
34.30
|
34.30
|
|
Hindalco
|
Aluminum
|
76
|
-1
|
1
|
26.91
|
26.91
|
|
Sun Pharma
|
Generic & Specialty Pharmaceuticals
|
76
|
42
|
4
|
22.51
|
22.51
|
|
TATA Steel
|
Iron & Steel
|
71
|
-4
|
1
|
18.43
|
18.43
|
|
RIL
|
Oil & Gas Refining and Marketing
|
68
|
4
|
7
|
18.61
|
18.61
|
|
Cipla
|
Generic & Specialty Pharmaceuticals
|
56
|
10
|
1
|
23.32
|
20.77
|
44.09
Source: BSE
|
How about ownership? Among the 30
companies in the Sensex (not necessarily a broad representation, but will
suffice for the case), we can notice four companies with significant foreign
ownership exceeding 50% that can consequently be technically defined as foreign
companies. However, even here we need to differentiate between FII ownership
(which may be subject to quick changes) and Promoter holdings (which is always
very stable). In that sense, HDFC cannot be classified as a MNC even though its
foreign ownership is more than 50%, since majority of that ownership is due to
FII holdings. Hence, the list reduces to Hindustan Lever (part of Unilever
group), Maruti Suzuki (part of Suzuki group) and Sesa Sterlite. In general,
they mostly operate within Indian market space, as signified by the low % of
revenue generated outside India, and tend to represent a sizeable share of the
Sensex (measured in terms of market capitalization).
Company
|
Business Sector
|
% Revenue outside India
|
3-year CAGR (Share price)
|
% share in overall Market cap
|
FII Ownership%
|
Foreign Promoter %
|
Total Foreign Ownership %
|
Jun-14
|
Jun-14
|
Jun-14
|
|||||
HUL
|
Household Products
|
2
|
23
|
3
|
14.58
|
67.24
|
81.82
|
Maruti Suzuki
|
Auto & Truck Manufacturers
|
10
|
29
|
2
|
22.36
|
56.21
|
78.57
|
HDFC
|
Consumer Lending
|
0
|
12
|
4
|
77.36
|
77.36
|
|
Sesa Sterlite
|
Iron & Steel
|
46
|
-1
|
2
|
17.97
|
54.94
|
72.91
|
Source: BSE
|
While MNCs eye the lucrative Indian
market apart from other markets, IMNCs eye the huge global markets apart from
the Indian market. The trend of Emerging Multinationals (EMNCs) is not a new
trend. China’s Huawei, Mexico’s Cemex, Russia’s Gazprom and Brazil’s Embraer
are but few examples. While some of these EMNCs would have internationalized
their national experience, MNCs would have nationalized their international experience
like that of Hindustan Lever. Of course, there are pure play IMNCs, like the IT
companies (TCS, Wipro, Infosys).
In my assessment, IMNCs will prosper immensely as they look at
global markets as an opportunity set as opposed to just targeting the Indian
landscape, alone. However, operationally it may be challenging to coordinate
vast networked operations and generate the requisite profits. Also, they may
have to manage political and currency risks in the process. Also, from a
governance point of view, the IMNCs may not be able to take with them notable
or worthy best practices while they compete in new markets, as India is still
learning to draft governance codes and is not widely acclaimed for such metrics,
currently. On the other hand, foreign MNCs may have a head start here in terms
of corporate governance.
What about financial performance?
Indian MNC’s (IMNC’s) enjoy a strong revenue growth relative
to MNC’s and emerging market MNC’s though there are exceptions like Tata Steel
and Hindalco. The high volume low margin nature of these sectors (steel and
aluminum) coupled with strong domestic competition in foreign countries can
explain this struggle. IMNC’s also enjoy superior net profit margins which
probably results in better RoE and RoA. Again Tata Steel and Hindalco trail the
ranking with poor net profit margins leading to lower RoE and RoA. Surprisingly,
Hindustan Lever (MNC) boasts of strong RoE and RoA. In terms of debt, IT and
Pharma among IMNC’s seem to rely less on this source of capital (due to high
operating cash flows probably) while manufacturing sector including Steel,
authomobiles, and Pharma have high D/e ratios. MNC’s have low D/E excepting
HDFC which is a bank.
IMNC's
|
Revenue, 5yr CAGR
|
Net Profit Margin, 5 yr
avg
|
RoE (in %), 5yr avg
|
RoA (in %), 5yr avg
|
Debt/Equity (in %), 5yr
avg
|
Infosys
|
23
|
24.3
|
27.1
|
22.6
|
0.00
|
TCS
|
31
|
22.8
|
41.2
|
30.3
|
0.50
|
Wipro
|
14
|
17.2
|
23.4
|
14.7
|
22.41
|
Tata Motors
|
35
|
6.0
|
42.3
|
7.6
|
221.29
|
Dr. Reddy
|
24
|
6.3
|
13.6
|
7.2
|
53.83
|
Sun Pharma
|
39
|
29.0
|
20.9
|
17.8
|
4.78
|
Cipla
|
19
|
16.9
|
17.2
|
13.1
|
6.87
|
Hindalco
|
7
|
4.1
|
11.3
|
3.3
|
134.09
|
TATA Steel
|
0
|
1.3
|
5.6
|
1.2
|
190.88
|
RIL
|
30
|
7.0
|
13.5
|
6.7
|
56.75
|
Multinational Companies (MNC's)
|
|||||
HUL
|
13
|
12.6
|
99.9
|
27.4
|
6.88
|
Maruti Suzuki
|
21
|
6.4
|
16.3
|
10.8
|
8.02
|
HDFC
|
22
|
21.8
|
22.6
|
2.3
|
541.68
|
Sesa Sterlite
|
91
|
43.1
|
25.9
|
10.7
|
39.06
|
Emerging Market (EMNC's)
|
|||||
Huawei
|
4
|
9.2
|
10.7
|
6.0
|
75.16
|
Haier
|
57
|
3.1
|
37.8
|
11.0
|
4.57
|
Gasprom
|
12
|
25.7
|
16.1
|
11.0
|
30.52
|
Embraer
|
4
|
5.5
|
10.6
|
3.6
|
73.71
|
Cemex
|
-4
|
-5.9
|
-7.2
|
-2.0
|
99.70
|
Source: Reuters
|
|||||
In summary, the old concept of MNCs is giving way to a new
breed of IMNCs that could add more value to their shareholders by expanding
afar the opportunity set, a move that by itself can diversify and reduce risk.
However, they have to contend with serious challenges of understanding various
geographies, the associated currencies, political and transaction risks. The sagas
and travails of Tata Steel-Corus and Tata Motors- JLR acquisitions are still
etched strongly in our memory!
