MNCs, foreigner-backed stocks on dream run in times of defaults & downgrades

NEW DELHI: Good image is fetching a premium in Indian stock market this season.

As Dalal Street struggles to separate the chaff from the grains amid widespread corporate governance issues and crippling rating downgrades at reputed corporate groups, MNC firms and some small foreign promoter-backed stocks are seeing an extended good run. A few of them have rallied as much as 74 per cent year to date.

MNCs and foreign promoter-backed firms are traditionally known for strong parentage, technological proficiency and asset-light business models. They are usually well-capitalised, have low debt exposures and good dividend policies.

While half the NBFCs are down in the dumps amid debt and liquidity challenges, foreign promoter-backed players Aavas Financiers (up 72 per cent) and CreditAccess Grameen (up 52 per cent) have kept on rallying to be counted among the best performers of the market this year.

Aavas Financiers is backed by private equity players Lake District and Partners Group, while CreditAccess is promoted by Netherlands-based CreditAccess Asia.

Shares of Black Rose Industries, where foreign ownership stood at 74.5 per cent as of March 31, are up 41 per cent year to date. This company deals in chemicals, textiles and owns India’s first acrylamide manufacturing plant.

Among other foreign promoter-backed companies, Hexaware Technologies, Xchanging Solutions and Sobha are all having a dream run on the bourses.

Among Indian arms of MNCs, Astrazeneca Pharma is up 31 per cent this year. Huhtamaki PPL, Procter & Gamble Health, Bata India, Heidelberg Cement India and Siemens have gained 20-30 per cent. Others such as Esab India, ABB India, Timken India, Honeywell Automation India, Abbott India and Pfizer are up 10-17 per cent. This compares with a 5-7 per cent slump in BSE Midcap and the BSE Smallcap indices during the same period.

Many of these stocks have delivered multibagger returns in last three years, while the later half of this period was quite a harsh for the broader market.

“MNC stocks, including those in consumer and NBFC segments, have been seeing a rerating over the past 2-3 years even though many of them were neither seeing either strong volume or earnings growth. If you map price multiples to actual earnings growth, you will see many MNCs got much better rerating of price multiples despite having slower earnings growth,” said Raunak Onkar, Head of Research at PPFAS.

While Aavas and CreditAccess are recent debutants, shares of Black Rose Industries have risen 244 per cent in last three years, 1,075 per cent in five and 2,950 per cent in last 10 years. Astrazeneca has doubled investor wealth in last two years, having risen 73 per cent in three years.

In all, 14 of the 139-odd BSE-listed MNCs have delivered 100-500 per cent returns in three years. As many as 36 stocks have rallied over 50 per cent during the period.

Not-so-transparent
Onkar said MNCs might have lesser corporate governance issues, but they are not as transparent as perceived.

“Most MNCs do not even hold conference calls or analyst meetings. They only have AGMs. Analysts can’t access the managements. Very few of them offer public disclosures with quality that matches those of their domestic counterparts. But somehow the market believes these companies are better governed than their local counterparts,” he said.

Consistent performers, high on valuations
Deepak Jasani of HDFC Securities said brand and technology leaders in consumer staples, discretionary, chemicals and industrials have consistently outperformed within the MNC space. These benefits, he said, have translated into high RoE, low leverage and better asset turnover.

That said, high valuations and slowdown in earnings growth have hit quite a few stocks.

To name a few, largecap MNC stocks such as Hindustan Unilever (flat), Maruti Suzuki (down 14 per cent), Nestle India (up 5 per cent), Britannia Industries (down 8 per cent), Vedanta (down 17 per cent) and Bosch (down 17 per cent) have taken a hit in recent times.

Jasani said while none of the MNCs are available at cheap or fair valuations, one should watch this space for sudden selloffs which is when they would offer good entry points.

Top picks
Antique Stock Broking prefers stocks that rank high on quality quotient, have made FY19- 21 earnings growth projections in the upwards of 15 per cent and command reasonable valuations on the bourses.

“Among the 15 largecap MNC stocks we cover, staples rank high on quality parameter. Industrials are another set of stocks which meet all parameters given the likely recovery in investment cycle. Stocks that meet all the three parameters include HUL, Nestle India, Bosch, Colgate, Siemens, ABB India, P&G Hygiene, Gillette India, Honeywell Automation, Glaxosmithkline Pharma and Cummins,” the brokerage said.

In the midcap space, Antique likes Bata, Whirlpool, Abbott India, Pfizer, Wabco India, SKF India and Thomas Cook. Grindwell Norton, Timken India, Johnson Controls, Linde, Federal Mogul, GE T&D, ICRA and Kennametal are smallcap MNCs the brokerage is positive on.