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Good Defensive Strategy: Investing In MNC Stocks

Author: Kumar Shankar Roy/Wednesday, May 20, 2020/Categories: Exclusive

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Good Defensive Strategy: Investing In MNC Stocks

In common parlance, randomness is the apparent lack of pattern or predictability in events. A random sequence of events, symbols or steps often has no order. They don’t follow an intelligible pattern or combination. So, even if the same thing gets repeated, chances are very high that the outcome will be different each time. But there are things that have similar results irrespective of the time of the causal factors. One example is MNC stock investing. In the last one year period, the Nifty-50 has fallen by 21 per cent (May 18, 2019, to May 18, 2020). In the same time, Nifty MNC has fallen by just six per cent. This lower fall is not a one-off event.

Every time broader markets fall, MNC stocks do a fabulous job of wealth protection. Remember, the Global Financial Crisis (GFC) of 2008-09? From 2008 to 2009, the broad market index fell by 35 per cent, whereas the Nifty MNC index fell only by 17 per cent. Clearly, investing in MNC stocks is a good defensive strategy. If the Indian stocks markets continue to remain under pressure due to a fragile economic outlook, MNC stocks can be expected to provide a safe haven. Read on to know more.

A bit of MNC in everybody's life

MNCs (Multinational companies) are catering to daily needs of many Indians. For toothpaste, you have Colgate and Hindustan Unilever (Pepsodent). For tea, there is Nestle. And if you need biscuits, there is Britannia. In mood for some instant noodles, Nestle’s Maggi is there again. When it comes to paints, Kansai Nerolac is right up there. The best looking smartphones are from Apple or Samsung.

If it is about medicines and life-saving drugs, there is a Pfizer, Sanofi, GSK Pharma product that you rely on. In the industrial segments, brands from GE Power and Castrol, products from Siemens and Cummins are popular. Commercial vehicles run on Bosch materials. Mining is incomplete without Vedanta and cement is synonymous with Ambuja Cement. 

MNC edge framework

MNC companies listed in India offer five distinct advantages. One: These companies offer a wide moat. A wide economic moat is a type of sustainable competitive advantage possessed by a business that makes it difficult for rivals to wear down its market share.

Two: MNCs always have a good management. They look after the needs of the majority shareholder and also the minority shareholders. Strong management is the backbone of any successful company. Good management ensures corporate governance, operational efficiency and maximizes shareholder wealth.

Three: MNCs offer technological edge. This edge is often something that makes the company a leader. This edge is a result of money power. For example, in 2018, Walmart spent an estimated $11.7 billion on IT, including hand-held devices and advanced cash registers for store staff, as well as increased robotics. This huge amount equalled just two per cent of company annual revenue.

Four: MNCs generate high returns from their businesses and thus have a strong balance sheet. Look at Oracle Financial Services Software. The debt-free tech firm in the last 10 years has generated nearly Rs 10,000 crore cash flow from operations, which is about half of its current market value of Rs 22,000 crore.

Five: MNC have a strong global brand, which allows them to quickly create their own niche in any market. MNCs are characterized as having strong global presence by consistently promoting universally appealing messages that promotes a ‘global’ culture.

MNCs are expensive

MNC stocks are not cheap. Rising valuation of MNC companies has added to the wealth creation, but for any investor buying an MNC means paying a rich premium. It takes a while to understand that MNC stocks can very well justify their valuation multiples. MNCs enjoy a valuation premium on account of strong market leadership, impeccable management track record, robust capital allocation, generous dividend payouts and superior perception relating corporate governance. For instance, Honeywell Automation India Ltd. trades at 51 times annual earnings compared to its peers who trade in 11-45 times range. Bayer CropScience Ltd stock trades at 70 times annual earnings compared to peers who trade in 25-50 times range. Gillette India and Hindustan Unilever stock trades at 67-69 times annual earnings.

The constant premium valuation is due to the fact that MNCs can provide greater stability to a portfolio during times of market volatility. In the long term, it is much more important to focus on the quality companies with good management than just valuation. With wide moats, superior tech know how, clean balance sheets and good management, MNCs have good potential to outperform the broader market in good times. These are companies that have weathered the competition in many markets globally and have gained from the experience.

India has been historically one of the fastest growing economies. MNCs with their inherent advantage may benefit from this growth opportunity. In the past, MNCs have demonstrated better use of capital allocation and hence managed to consistently deliver higher financial returns.

The writer is a journalist with 14 years of experience


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