MNC Stocks :Bank On Quality MNC Stocks For Outperformance!!

With equity returns dwindling for a majority of investors, most investors are wondering what needs to be done not only to protect the portfolio returns, but also to outperform the key benchmark indices.

After testing investors' patience for more than 18 months now, markets are testing investors' conviction in the asset class itself even as experts believe this is the right time to accumulate stocks as the valuations are getting cheaper, especially for the broader markets.

While the broader consensus is that the valuations have become attractive for very many small-caps and mid-caps, the larger concern amongst the investors seems to be the corporate governance issue and lack of quality in listed stocks. Indeed, the ratings downgrading of some of the reputed corporate groups and corporate governance issues have shifted the focus on the listed MNC stocks.

We can find all the qualities listed below in the MNC stocks:-

1. Proven business model and strong parentage
2. Superior technology leading to technology moat
3. Capital adequacy and lower leverage (asset light business model)
4. Strong products and brands
5.Decent to large market shares
6.Acceptable growth in EPS, sales, etc. with investor friendly dividend policy
7.Good corporate governance

Listed MNC stocks do have some advantage over their Indian counterparts (competition) and hence can be looked at by investors for long term investments in the current market conditions. The advantages may vary from company to company. One just needs to identify the economic moat and invest after looking at the stocks using the bottoms-up approach of investing.

Bonanza Portfolio says, “MNCs can be categorised as those having

1. Technological moat (Bosch, AstraZeneca, Abbott, Timken, Suzuki, etc.,)
2. Huge presence in India and strong brands (HUL, Colgate, Gillete, etc)
3. Unique edibles (Nestle)

These companies are in a position to command higher profit margins and launch superior products (brands).” 

These set of stocks will become even more attractive if the market correction intensifies, making these highly valued stocks little cheaper.

MNC stocks' performance

It is seen that brand leadership and technology leadership have provided MNCs a big advantage in consumer staples, industrials, discretionary and chemicals. Most of the stocks in these sectors have displayed higher RoEs, lower leverage and better than industry asset turnover. Having said that, some of the heavyweights within the MNC space have shown underperformance in recent times and can be vetted appropriately.





Umesh Mehta
Head of Research, Samco Securities

What is your outlook on MNC stocks?

In the midst of the dying trust among D-Street participants due to umpteen number of defaults by companies and corporate governance issues, investors look to MNCs as safer havens. With their strong parentage and most uptight corporate governance, these companies are definitely safer bets. To add to it, they have a vast network of distributors and reach, diverse products to meet various age-bracket needs and the ability to compete in the global markets. Their sheer scale of operations, technological proficiency and streamlined systems provide them the ability to scrape through tough times with higher agility and ease. MNC stocks are consistent performers and investors should learn the art of getting into these stocks at lower levels so they can reap the benefits of higher returns.

What percentage of portfolio can be invested in MNC stocks in your view?

When times are tough, holding MNC stocks can provide stability to the portfolio. However, concentration of companies from the same sector can prove to be risky. Risk-averse investors must therefore limit MNC stocks from one sector to a maximum of 15-20% of his/her portfolio. Diversifying your portfolio in this manner will provide safety in the long run.

Conclusion

One can smell investing opportunity when one looks at listed MNC stocks closely, especially after recent underperformance when compared to the key benchmark indices. The quality aspect of MNC stocks is crucial and gives these set of stocks an edge. Having said that, one must remember that MNC companies, when compared with their Indian counterparts, are not perceived to be transparent.

Apart from the non-transparent behaviour of several MNCs, the economic moat that most of these listed MNC companies have to offer makes them irresistible for long term investments. Relatively safer, well-capitalised and less leveraged are some of the key positives for the MNC stocks. Not to forget, most of these listed MNC stocks have a consistent dividend policy which, in the long run, almost always proves to be an excellent booster to the portfolio returns. Investors can scan for opportunities in the mid-cap pharma MNC stocks that are less prone to US FDA risks when compared to their Indian counterparts owing to better manufacturing processes.