MNC Buybacks No Guarantee of Smart Gains

Experts warn against getting carried away by the recent success of two delisting offers, say co fundamentals, valuations key to decision

The response to the offers of Bayer Cropscience andFreseniusKabi todelist indicates that investor interest in share buybacks by the Indian arms of multinational companies (MNCs), has revived. But fund managers and investment advisors say investors should not get carried away hoping for huge gains. 

Expectations of big gains are high in the backdrop of a weak rupee, which helps the overseas parent, and reasonable valuations, besidesthe recent movesby theReserveBank of India to boost inflows.
Last year, stocks of listed subsidiaries of MNCs operating in India were in demand after the Securities and Exchange Board of India (Sebi) mandated them to meet the minimum public holding norm of 25% by June 2013. Investors made good returns when companies such as Alfa Laval and UTV Software delisted. On speculation that many other MNCs,too,wouldfollowsuit,the valuationsof such stocks rose to high levels. But the bubble burst as many companies preferred to dilute their promoters’staketo meet Sebi norms.
This was followed by a few MNCs buying back shares to raise promoter holding. The stocks of GSK Consumer and Hindustan Unilever spurted on completion of the buyback process. A number of MNCscrips are already seeing improved buying interest on rumours about potential delisting or buybacks, particularly after RBI allowedthem tobuy shares in the open market earlier in September.
Given this backdrop, retail investors are again looking at MNCs for ‘smart’ gains through delisting or buybacks. However, investment advisors say that investors should exercise caution. “Last time, when there was an MNC delisting fad, valuations went haywire, but finally when most MNCs decided to dilute stakes to meet Sebi rules, retail investors were the ones who burnt their fingers badly. So my advice is not to act on such fads,” says P Phani Sekhar, fund manager (PMS), Angel Broking. Sekhar says not all MNCs are doing well. Not allMNCs arefocusedon theIndian markets. “What HUL or Glaxo did shouldn’tbetaken asexample andextrapolated to all the MNCs,” he warns. Investors should not buy an MNC company’s shares justfor thesakeof delisting or buyback gains, says Gautam Trivedi, MD and head of equities, Religare Capital Markets. “We don’t know when such a development will take place or the premium at which such an offer wouldbe priced. Secondly,suchdecisionswill differ from company to company. So it will be basically speculation,” he says.
Yet, there are a few who see sense in buying into such companies. “The rupee is down some10-12% from a year ago and market valuations are down to more reasonable levels, so it makessensefor MNCsto raisestake in Indian subsidiaries,” says G Chokkalingam, managing director and chief investment officer with Centrum Wealth Management. “There willbeuncertainty in the marketsfor another six months. In this time, we expect to seen a few more such deals.”
Dipen Shah, head of private client group researchwithKotak Securities alsosaysthere is a case for some MNCs to either go for a buyback or to delist. “However, one shouldn’t give too much weightage to this theme in the overall portfolio,” he says. An investor willing to investbasedon thisthemehastotakedecision based on fundamentals and valuations of eachcompany,saytheseexperts. “If a favourable corporate action indeed takes place, it will be icing on thecake,”saysAngel’s Sekhar.
Centrum’s Chokkalingam suggests investors go through a quick checklist. “One should first check the company’s business model, which is most important. The parent company’s balance sheet and whether there were any previous delisting attempts should also be considered, followed by the price point and valuation multiple.”