Transcript

Hi, I’m Viram from Vested and today we’ll discuss whether it makes sense to invest in MNCs or multi national companies through their Indian subsidiaries or whether you should invest in their parent entity listed in the US.

There are many MNCs listed on the Indian stock exchanges, and these provide interesting investing opportunities – the likes of 3M, Whirlpool, Colgate, Abbott and others have all have listed their subsidiaries in the India market.

Being global in nature, these companies provide a higher level of governance, better technological proficiency and also transparency. What’s interesting is that today investors have a choice – they can either invest in these MNCs via their Indian subsidiary or they can also directly invest in the parent company through the US market itself.

We first ran this analysis in 2019 – comparing the returns from investing in India subsidiaries vs. the US parent company.

Interestingly, both approaches delivered about the same returns. Investing in the Indian subsidiaries of these MNCs on average generated about 3% higher returns specifically for the year 2019, which was likely boosted by the corporate tax cut in September 2019.

However the key finding was that had you invested in these Indian subsidiaries, you would have had to pay a much higher multiple, almost 3 times more than you would have had to pay when investing in the US entity and you would also experience much higher volatilities.

Now, let’s look at the latest analysis that we did for the period between Jan 2020 to March 2021. Overall, 2020 and 2021 have been an unprecedented period for the US and the Indian stock markets. The global lockdown and its macroeconomic impact hit both the US and the Indian economies pretty hard, but the stock markets in both countries rebounded rather quickly, which means both markets performed really well.

Now, for our analysis, first we took a look at valuations. We found that fourteen out of fifteen MNCs that we examined had much higher valuations compared to the US parent. For some, the difference in valuation was monumental. On average, the Indian subsidiary is valued almost 4X higher than the MNC parent listed in the US.

The Indian subsidiaries of 3M and Whirlpool are valued more than 10X higher than the US parent company. 3M India is valued almost as highly as Tesla and is 3-4 times higher than what is Google’s, Amazon’s or Microsoft’s valuation! We saw that the valuation of the MNCs in the US vs. the Indian companies is much more sensible for the mature companies that they are.

So next we thought that okay, if the Indian subsidiaries are a lot more expensive, they should at least deliver higher returns to make the investment worthwhile right? But what we found was that this was not true at all!

We found that on average, the return profiles of the US based parent company and their expensive Indian subsidiary are actually quite similar. This means that when you invest in Indian subsidiaries, you’re paying much more for pretty much the same amount of returns!

Lastly we checked for volatility. We found that the Indian subsidiaries have much higher volatility. The higher the volatility, the more the share price moves throughout the year, and the riskier your investment tends to be.

11 out of the 15 MNCs that we examined have Indian subsidiaries that have been more volatile than the parent company.

To conclude, when you invest in Indian subsidiaries of US based MNCs, you end up paying more, and face much more risk because of high volatility, for pretty much the same returns!

We hope this video helps you in your investment decisions.

Stay tuned for more!

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Our team members at Vested may own investments in some of the aforementioned companies/assets. 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.

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.

This video 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 of 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.