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Be fearful when others are greedy. Be greedy when others are fearful’
These golden words are always forgotten as people get carried by the sentiments. However, the smarter ones grab the opportunities surreptitiously.
As we step into 2014, stock market forecasts are making new waves in the media. While everybody has been talking about high inflation, decade-low growth, falling rupee and the fear of Fed tapering, there are a few (mostly promoters) who are increasing their stakes through the buyback route. This probably suggests early recovery signals for the Indian stock market.
MNCs hiking stake in Indian subsidiaries
On April 30, 2013, Unilever plc announced increasing the stake in its Indian subsidiary, Hindustan Unilever Ltd (HUL). The stock jumped by around 20% the same day. Indian equity markets have seen a slew of similar announcements by multinational companies to hike the stakes in their Indian subsidiaries over the past few months. While clearly there is an increased focus on India owing to its higher growth potential compared to the developed markets, inexpensive valuations and weaker rupee/dollar situation, minority shareholders have been benefitted immensely due to these announcements.
* Going private—By acquiring 100% stake in Indian subsidiaries and delisting, any strategic decision-making (e.g. royalty payment) process gets a lot smoother for the parent company. Also, as a private entity, disclosure norms are more relaxed compared to a public entity.
* Catching the high growth potential of emerging market economies—As per Unilever plc’s Q3’CY13 results, for nine months ended September 30, 2013, it achieved an overall sales growth of 4.4% while the emerging markets achieved 8.8%. India has been one of the fastest growing markets for Unilever, with a sales growth of 10-15% and volume growth of 5-10%. This kind of parallels can be drawn with respect to many other MNCs and their Indian subsidiaries. Thus, increasing the stake in Indian subsidiaries and securing a higher pie in the high growth market make business sense for MNCs.
* Better utilisation of idle cash —There is a lack of good investment opportunities globally, especially due to the weak economic environment. Most of the MNCs are sitting on idle cash earning a very low return of 1-2%. In contrast, well-run Indian subsidiaries of MNCs are providing a higher return on equity (RoE).
* Depreciation of the rupee makes valuation attractive—When the open offer for HUL ended during the first week of July 2013, the USD/INR conversion rate was R59/$