Multi-National Corporations (MNCs) are known for their efficient management, transparent operations, adherence to global standards and competent product offerings. There have been a number of MNCs doing business in India. Few of them have become popular with their brands which have become household names, while a few others are still less-known. By and Large, MNCs have generated steady returns but one should not take their success for granted. These days, it is said that, many MNC stocks are quoting at a huge discount as compared to their historical valuations. Given their underperformance in the recent past, some mutual funds have become bullish on theme MNC again. Sundaram Mutual Fund is one such fund house which has recently launched a 5-year closed ended select micro-cap fund. As per fund house, the strategy is to invest predominantly in MNC companies which have a market capitalisation lesser that than of 301st company listed on National Stock Exchange (NSE) PersonalFN has always believed that playing a particular theme or investing in thematic funds is dangerous.

Let's check how MNCs have collectively performed in the recent past.

Will MNCs continue to underperform?

Data as on January 31, 2014
(Source: ACE MF, PersonalFN Research)

Underperformance of CNX MNC in the recent past suggests they have been falling out of favour with investors. While CNX Nifty has rallied over 5% since October, CNX MNC has generated only around 2% returns.

Why MNC stocks are underperforming?
Weaker rupee and difficult economic conditions are hurting MNCs. Some of European and the U.S. based companies treat India as their one of the most strategic markets. But falling rupee is hurting their earnings when converted in U.S. dollars or in Euro. Like any other company, tough economic conditions are affecting MNCs too. However, the royalty payments have been rising steadily since India abolished a limit on royalty payments in 2010. Since then parent companies have been collecting higher royalty fees from their Indian subsidiaries. Parent companies charge subsidiaries such fees for providing them technological know-how, letting them use the international brand and sharing research platform among others. Higher royalty payments dilute net profits of Indian subsidiaries. Moreover, the Government hiked the tax on royalty payment from 10% to 25% in last budget which would eat further into profits. Minority shareholders are expected to be affected negatively with such developments.

Speaking about valuations, you shouldn't construe falling prices of MNC stocks as moderating valuations. It is noteworthy that shares of many MNCs were rising on speculation that MNCs may delist themselves from India offering spectacular exiting opportunities to shareholders. Securities and Exchange Board of India (SEBI) had made it mandatory for companies listed in India to have minimum 25% of public shareholding. With exception of few other MNCs which had more than 75% of stake in Indian subsidiaries, preferred to dilute stake rather than going for delisting option. Valuations were extremely high in case of to-be delisted MNC list which cracked after MNCs preferred to dilute.

PersonalFN believes that diversified equity funds focusing on opportunities across sectors, themes and market capitalisation segments are better bets than concentrated sector or thematic funds. Undoubtedly MNCs bring with them global experience and offer strong parental support to their subsidiaries but they may have limitations too. It would be wrong to believe that all MNCs can do impressive business in India. There have been cases where even MNCs have failed. PersonalFN is of the view that, some MNCs can outperform broader markets but based only on their merit. You would be better off relying on opportunities funds to benefit from any such opportunities.

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