Be fearful when others are greedy. Be greedy when others are fearful?
?Warren Buffet
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.
Why buyback?
* 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.
Why now?
* 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/$ 1. Barely 18 months back, during Jan-Feb 2012 USD/INR was hovering around 50. The rupee has depreciated by 15-20% against major currencies during this period of time. So even though Unilever purchased HUL shares at 600, applying the rupee depreciation of 15-20%, it actually bought the shares at 480-510/share, making the deal attractive for Unilever.
What?s in it for minority shareholders?
In case of a stake hike by an MNC parent, minority shareholders get benefitted.
* In most cases, as seen in the table, the buyback/open offer price is at a healthy premium to the current market price
* On top of it, in an MNC which is not very liquid/widely held, the open offer price is often revised upwards if the parent company doesn?t obtain its desired stake
* Similar benefits also get accrued to a minority shareholder if the parent company goes for a delisting of the subsidiary.
* On the flip side, after the buyback if the parent company holds a substantial stake (close to 75%) in the subsidiary, some of the decisions like royalty payment (e.g. Unilever/HUL or Holcim/Ambuja case), mergers/acquisitions might go against the interests of minority shareholders.
Also, in case of a buyback of own shares by a company, minority shareholders are positively impacted due to following reasons.
* It acts as a sentiment booster since the company sees better growth opportunities and feels the stock at current market price is undervalued
* After buyback, the number of outstanding shares decreases to the extent of buyback, thus, increasing earnings per share (EPS) for the stock
Open offers ahead
On a market capitalisation basis, MNC-listed companies constitute around 10% of the total listed companies on the Bombay Stock Exchange (BSE). Going ahead, in the next few months, we might see a number of MNCs coming out with open offers on Indian subsidiaries. In most cases, Indian subsidiaries of MNCs are well-managed with good corporate governance records and low debt-equity ratios. Along these parameters if we find a business with high growth potential, it makes a good case for investment in an Indian subsidiary of an MNC.
The added interest in buyback shown both by foreign and Indian companies indicate the worst for Indian equity markets is behind us. It should not be long before Indian markets, like other developed markets, break out of the five-year range and charter into a new territory. This probably is a good time for investors to enter the equity market and stay invested for a time horizon of 5-10 years to benefit from the Indian economic growth story and market upside.
Nirakar pradhan
The author is CIO, Future Generali India Life Insurance Co Ltd
