November 30, 2019
Investing in MNCs through their Indian subsidiaries - is it a good idea?
Many investors from India ask us: Why invest directly in the US stock market through Vested? Can’t we just invest in the Indian subsidiaries of these companies since they are publicly traded in India?
In this week’s update, we try to answer this important question (with data!).
Investors from India are attracted to invest in multinational corporations
To clarify the issue - Yes, Indian investors are able to invest in select multinational corporations (MNCs). They do this by investing in the Indian subsidiaries of these companies through the Indian stock market. Many invest in these Indian subsidiaries because they assume there is a higher level of governance, technological proficiency and transparency.
But, is investing in these Indian subsidiaries really better than directly investing in the parent US-traded companies?
Investing in Indian subsidiaries is often a more expensive proposition
We looked at 16 MNCs that are traded in reputable US exchanges which have Indian subsidiaries that are publicly traded in India. The full list of the companies can be found in Figure 1.
Recall that investing means buying an ownership stake in a business. And how expensive the investment is (relative to others) can be measured by the P/E ratio. A high P/E ratio means that the investor has to pay more (in terms of share price) for every dollar/rupee the company earns.
Looking at the trailing twelve-month P/E (price over earnings from the last twelve months - P/E TTM), it is clear that the Indian subsidiaries tend to trade at higher (more expensive) multiples.
- Take Colgate-Palmolive for example, the parent company (ticker: CL) trades at 24.81 P/E TTM in the US, while its Indian subsidiary, Colgate-Palmolive (India) Limited (ticker: COLPAL.BO) trades at 51.33 in India, more than 2X higher.
- From this list, the smallest discrepancy is between Oracle Corporation (ticker: ORCL) and its Indian subsidiary, Oracle Financial Services Software Limited (ticker: OFSS.NS), which, unlike the parent company, focuses on software for financial services.
- The largest discrepancy is between Linde (ticker: LIN) and its Indian subsidiary, Linde India Limited (ticker: LINDEINDIA.BO). The parent company has a P/E - TTM of 22.7 in the US, while the Indian subsidiary is trading at a multiple of 213.33 in India. That’s a whopping 9.4X, likely because the share price of Linde India has been boosted by a potential delisting.
On average, investors from India are paying ~3X higher multiples (P/E TTM) when investing in the Indian subsidiaries vs. investing directly in the parent company in the US.
Figure 1: Trailing twelve month P/E of 16 US MNCs and their publicly traded Indian subsidiaries. On average, the Indian subsidiaries are trading at a P/E multiple that is 3X higher. Note that data was as taken between Nov 26th - 27th, 2019.
Are the higher multiples worth it?
Typically, if you invest in companies with higher multiples, it is because of the promise of faster growth. But that is not the case here. Despite paying significantly higher multiples, the average returns from the past year are similar. The average past year returns of the US parent companies is ~14% (blue line in Figure 2), meanwhile the average returns of the Indian subsidiaries is ~17% (orange line in Figure 2).
Figure 2: Average one year return of US parent companies (orange) vs. Indian subsidiaries (blue). The grey lines represent the return of the individual entities over the past year.
In other words, data from the past year suggests that to invest in the subsidiaries of these MNCs, investors from India are paying 3X higher multiples, while enjoying only an additional 3% returns vs. the US (and this is likely driven by the Indian corporate tax cut which was announced in September 2019 - see Figure 2).
To make things worse, the share prices of these Indian subsidiaries are typically more volatile when compared to the US parent company. As a result, the Sharpe ratio (a measure of risk adjusted returns - the higher the number is, the better the expected return for the same risk) of the Indian subsidiaries are typically lower. GlaxoSmithKline is an exception to the companies listed here. The sharpe ratio for the US entity is matched to its Indian subsidiary (and notably, it is the only company from this list where the P/E multiple of the US traded entity is less than the Indian subsidiary - see Figure 1).
Figure 3: Sharpe ratio comparison based on historical data from previous one year of US MNCs vs. their Indian subsidiaries. A negative number means that returns were negative. Note that this calculation does not take into account the risk free return.
Ok, so back to our original question. Is investing in these Indian subsidiaries better than directly investing in the parent US-traded companies?
The data from the past year suggests that the answer is NO. Investing in the Indian subsidiaries can be a more expensive and more volatile proposition. If investors from India can get easy and relatively low-cost access to investing in the US-traded parent company - that might be a better proposition.
This article is meant to be informative and not to be taken as an investment advice, and may contain certain “forward-looking statements,” which may be identified by the use of such words as “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, without limitation, estimates with respect to financial condition, market developments, and the success or lack of success of particular investments (and may include such words as “crash” or “collapse”). All are subject to various factors, including, without limitation, general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors that could cause actual results to differ materially from projected results.
Our team members at Vested may own investments in some of the aforementioned companies. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for an investor’s portfolio. Note that past performance is not indicative of future returns. Investing in the stock market carries risk; the value of your investment can go up, or down, returning less than your original investment. Tax laws are subject to change and may vary depending on your circumstances.