There was a news recently published in the Economic Times, which shows an interesting trend of MNC giants investing more in their Indian subsidiaries. The size of these Indian subsidiaries are minuscule compared to the parent company, but their profitability and presence in a growing market gives the parent, a strong return on their investment.
India's leading FMCG company Hindustan Unilever has a profit margin of 14%, while its parent has margins of 10%. Similarly Nestle, P&G and Colgate have higher margins than their parents. (Source: Economic Times)
India's growing population and positive demographics have been contributing to tremendous growth. The returns are phenomenal as these brands have invested long ago and already built their market, distribution channels and production capacities long ago. Hence, the cost of expending is not too high because the capital base and investments are already in place and most of these companies are generating free cash flows and need little or no capital to expand further.
These companies do not need fresh capital or funding to expand their penetration to rural and semi urban areas. Hence their return on capital and return on equity is really high. For Hindustan Unilever these returns have been in the 90-100% range, which is practically beyond imagination for companies in developed markets.
The other advantage for these global companies is that they get the advantages of lower employee costs, lower production costs, etc, which are significantly lower than those of developed nations. The young and growing population in India helps them grow their business even during recessionary times.
These advantages are also enjoyed by Indian MNCs such as Tata Motors, TCS, Infosys, etc. who have expanded to several nations and derive a major portion of revenue from abroad. Experts predict that overtime the growth in India will increase the size and scale of the Indian MNCs and gradually reduce the gap between them and their parent companies.
This is one of the reasons why Unilever plc, Glaxo Smithkline Consumer Products and other large parents have increased their stake in their Indian subsidiaries. The strong growth and returns make MNC stocks favourite among investors and their trade at high PEs, and are never cheap. However, some intermittent corrections in market can provide a golden opportunity for investors to buy in to these wealth creators. If one looks back 10 years in the past one can clearly see how some of these MNC companies have created huge wealth for investors.
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