Column: Sensex high, MNCs higher

Nov 01 2013, 21:05 IST
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SummaryIn four of the last five years, the CNX MNC has outperformed both the Sensex and the Nifty

In January this year, Hindustan Unilever (HUL) said it intended to gradually up the royalty that it would pay Unilever Plc to 3.15% of sales, or roughly twice the amount it was paying then, in about five years. Understandably, the news upset investors; it also gave proxy advisory firms reason to carp about how multinational firms were sending back too much to their parent firms. Since the government liberalised the royalty rules in late 2009, through Press Note 8 lifting the cap on such payments, HUL was well within its rights to pay more. But since that would hit earnings, the HUL stock lost some value.

Interestingly though, had investors not sold their shares that day, at levels of R481, they would have made a small fortune; between then and July 23, when the stock hit a lifetime high of R718.90, it ran up some 50%. Such an appreciation in stock values is rare and happened only because Unilever said, in April, it was willing to buy out all minority shareholders in HUL at R600 apiece leaving only a float of 25% to comply with listing norms. But the fact is that those who stayed invested made good money.

Analysts and advisory firms are always quick to point out that MNCs pay out too much royalty—they argue that these are made at rates that are faster than those at which the company’s sales and profits are growing. To suggest that companies of the size of an HUL—revenues in FY13 were R27,003 crore—should be growing at the same pace at which royalties are paid out; R392.3 crore in FY13 doesn’t seem rational. Maruti Suzuki, for instance, turns in revenues of close to R45,000 crore—R43,588 crore in FY13 when it paid out royalties of R2,454 crore—and to expect the company will keep up the sales momentum on such a high base is simply being too demanding.

Especially since, except for some brief periods, these stocks have not really disappointed investors in the long run; over the two decades between March 1991 and now, the HUL scrip has given shareholders a return of 5,000%, stupendous compared to what the rest of the market has done—the Sensex returned approximately 1,100%. Indeed, shareholders had little reason to complain because MNCs typically hand out generous dividends; HUL’s average payout over the last 15 years, for instance, has been upwards of 80% at 84%—few Indian companies match this—while the return

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