Indian subsidiaries deliver more value for multinationals

The Indian subsidiaries of global multinationals such as Unilever, Suzuki, Siemens, ColgatePalmolive, and ABB are running at double the pace of their parents. Multinational companies’ arms listed on Dalal Street now account for 6.3 per cent of their parents’ total market capitalisation (m-cap), up from 3.1 per cent in the beginning of 2013.

Maruti Suzuki and Hindustan Unilever are the biggest contributors to this surge. At its current stock price, Maruti’s m-cap is nearly 50 per cent more than its Japanese parent’s (Suzuki Motor Co’s), while HUL’s market capitalisation is 28 per cent of Unilever’s.

The combined m-cap of 52 Indian subsidiaries in our sample is up 120 per cent in dollar terms in the past five years, as against 10 per cent rise in the combined m-cap of their parents during the period. As a result, Indian subsidiaries are now trading at a 150 per cent premium to their parents on the priceearnings multiple basis compared to 80 per cent at the start of the current rally in 2013.

Analysts attribute it to a more powerful rally on Dalal Street compared to other major markets. “The stock rally in India has been much stronger than in most of the developed markets. This greatly benefited MNCs as most of them are leaders in consumer segments, where investors’ interest has been the greatest,” said Dhananjay Sinha, head of research, Emkay Global Financial Services.

Indian subsidiaries have raised their financial contribution to the parents’ coffers during the period, but the proportionate rise in revenues and profits is much less than the rally in their stock prices. Their revenue contribution was up 40 basis points, while net profit contribution was up 60 basis points during the period. And the momentum is now waning as growth revives in the developed world.

Indian subsidiaries (listed) now account for 2.4 per cent of global revenues of 47 global multinationals in the Business Standard sample, up from 2 per cent five years ago. In the same period, Indian subsidiaries’ contribution to profits increased to 2.4 per cent from 1.8 per cent in 2013.

The analysis is based on the annual revenue and profit of listed MNCs in India and their global parents. The mcap data is at the end of period for the respective financial year. The current year data is on trailing 12-month basis. For MNCs with more than one listed subsidiary in India, the numbers have been consolidated. All numbers are in US dollar terms.

“Developed economies took much longer to come out of the recession triggered by the Lehman crisis compared to India. Besides, Indian economy never stopped growing even at the depth of the economic slowdown unlike many developed economies, which are the home markets for MNCs," said G Chokkalingam, founder & MD, Equinomics Research & Advisory.

The relatively better financial performance of Indian subsidiaries over their parents in the past five years is evident. The combined global revenues of MNCs are down 6.9 per cent since FY13, as against 12.6 per cent rise in Indian subsidiaries’ revenues in dollar terms during the period. The combined revenues for Indian subsidiaries are, however, down 0.3 per cent during the period if Maruti Suzuki were to be removed.

The combined net profit of global MNCs is down 4.4 per cent during the period, as against 30.6 per cent growth in the combined net profit of their Indian subsidiaries. The profit growth for Indian arms, however, drops to 4.9 per cent exMaruti Suzuki and 1.1 per cent ex-Hindustan Unilever, respectively.

However, Indian subsidiaries will have to grow faster to stay ahead of their parents. Recovery is expected to be quicker in developed countries than in India, where growth has been hit by demonetisation and the goods and services tax (GST). “Corporate earnings are likely to grow faster (in constant currency) in developed countries than India, where MNCs are now reporting low single-digit growth in volumes and revenues,” said Chokkalingam.

The combined global revenues of MNCs were up 1.7 per cent on a trailing 12month basis in 2017, as against 1.4 per cent growth reported by their Indian subsidiaries during the period. Excluding Maruti and Hindustan Unilever, Indian subsidiaries’ combined revenues are down 4.3 per cent in the current fiscal year.