BSL MNC Fund – a smart investment bet across market cycles
Multinational Corporations or MNCs, as usually referred by people have always been the favourite among the investors. Strong corporate governance, great earnings capability and rock solid share performance have helped these stocks carve out a niche for themselves. Doing business in India continues to remain a challenge for multinational corporations; however the success of these companies since the economic liberalization has been a salient feature.
BSL MNC Fund which takes exposure towards such quality MNC companies is one of the most consistent performers across categories in the industry. AUM of the fund as on 31st May, 2016 was Rs.3220.61 Crores (Source: Value Research) while the fund has delivered 18.47% C.A.G.R since inception while its benchmark has delivered 10.92% C.A.G.R (Source: MFI Explorer) thereby generating an alpha of close to 8%.
Growth of MNCs
In the early 1990s, multinationals catered to the basic demands of the Indian consumer in fast-moving consumer goods (FMCG) and automobiles, and Hindustan Unilever Ltd (HUL) and Maruti Suzuki India Ltd together held around 40% of the MNC share. As India's economic liberalization played out, the demographics of successful MNCs shifted: new and diverse sectors such as technology and consumer durables became prominent.
Over the years, the business reasons drawing multinationals to India have evolved, and based on their market focus, MNCs can be grouped into three distinct categories: those that look on India as an end market, treat it as a centre for back-office functions, or as a global business hub (including for exports).
As early as the 20th century, global brands were in India, focusing on local consumers as the end market. Then multinationals developed a new business focus: outsourcing. They leveraged India's low-cost skilled workforce to provide back-office functions such as information-technology services. More recently, a number of MNCs have gone to the next level, positioning India both as a business hub serving global clients and as a base for exports. Most such companies are automobile or consumer durables manufacturers. Union Government's pet project Make in India initiative received stellar response from global manufacturing companies, making it a strong case towards making India a global manufacturing hub.
India remains an unavoidable draw for MNCs even when their first efforts fail. A number of companies, including Coca-Cola Co., have entered, exited, and then re-entered India, ultimately finding success. The following are the key success factors that have helped MNC companies grow and sustain in India:
Bold commitment to India
Tailor offerings for India
Adapt repeatable model
Invest in local talent
Create road map for results
Fund Investment Strategy
BSL MNC fund primarily follows a bottom-up style of investing. While identifying companies the criteria is to evaluate companies which are expected to deliver consistent growth over the medium to long term. Factors such as management strength, company's product range, consumer/customer feedback, market size/share, free cash flows, corporate governance, valuations, etc are considered while making an investment decision. Investment team works towards identifying high-quality global companies which have a sizeable opportunity in the Indian market and in this process builds a portfolio of such companies which have superior return ratios and strong balance sheets.
Why preference for MNC companies?
BSL MNC Fund consists of companies which are global in nature and are present across geographies, including other emerging economies. They boast of a wider product portfolio and have the required experience to launch solution-based products at the right time in the economic cycle. Most of the companies which are a part of the portfolio are not cyclical in nature and are good investments across market cycles, with key attributes like superior return ratios, efficient usage of capital and focused approach on increasing market share over market cycles. With their vast experience across geographies and market cycles, these companies are in a better position to manage the changing market and growth cycles which make them a sustainable investment theme.
Valuation Perspective
| Group/Investment | P/E Ratio (TTM) (Long) 07/2015 | P/E Ratio (TTM) (Long) 08/2015 | P/E Ratio (TTM) (Long) 09/2015 | P/E Ratio (TTM) (Long) 10/2015 | P/E Ratio (TTM) (Long) 11/2015 | P/E Ratio (TTM) (Long) 12/2015 | P/E Ratio (TTM) (Long) 01/2016 | P/E Ratio (TTM) (Long) 02/2016 | P/E Ratio (TTM) (Long) 03/2016 | P/E Ratio (TTM) (Long) 04/2016 |
| Birla Sun Life MNC Gr | 48.66 | 47.78 | 45.48 | 46.30 | 44.98 | 45.89 | 43.48 | 40.62 | 43.37 | 44.17 |
MNC Stocks generally trade at a higher PE compared to their domestic counterparts and the same can be inferred from the above chart where PE ratio of BSL MNC Fund in last 10 months have consistently traded in 40s. In fact certain MNC companies which consistently grow at high rates Y-o-Y tend trade at higher multiples, i.e. because they have higher demand for the positive outlook that investors have around the company's prospects. PE ratio conveys a fraction of a valuation and factors such as superior technology/brand, better allocation of capital, industry size, market share, growth potential, etc. play a crucial role in investment decision for a particular stock. Quality & earnings in the long run for MNC companies are important and higher valuations for such quality earnings are justified.
In order to get more clarity on higher PE ratio for portfolios, let's look at a live example of a stock which is a part of BSL MNC Fund. Gillette India Limited (accounts for 7.06% of the portfolio as on 31st May, 2016) had a PE of nearly a 3 digit number when the fund manager was adding the stock to the portfolio. However since then the PE ratio has reduced drastically due to consistent increase in the earnings per share of the stock. The same can be inferred from the following graph:
Inspite of a higher PE ratio, the investment team was able to identify the earnings growth capability of the stock. They have focused on the quality and earnings in order to make a long term view on the company. There are host of factors considered while making an investment decision and a near term PE ratio doesn't indicate whether it's cheap/expensive. Other valuation matrices such as EV/EBITDA, EB/Sales, P/B, etc are also considered depending on the business model of the companies. Thus having this stock in the portfolio has contributed to the fund's performance and justifies investment team's conviction on quality & earnings of the stock.
A Proven Match Winner
BSL MNC Fund is a proven match winner when we look at it's consistent performance since inception. Infact the fund has delivered superior performance across periods even when we compare it to Midcap (Midcap 100) and Large cap (BSE 200) indices. The fund has outperformed the benchmark not only during up markets but also during bear markets by minimising downside.
| Scheme Name | 1 year | 3 years | 5 years | 10 years | Since inception |
| BSL MNC Fund | 3.66 | 30.33 | 22.30 | 19.55 | 18.45 |
| Nifty Free Float Midcap 100 | 4.17 | 18.99 | 10.64 | 12.57 | 19.11 |
| Nifty MNC | -3.58 | 16.48 | 12.97 | 12.64 | 10.94 |
| S&P BSE 200 | 1.62 | 13.01 | 8.60 | 10.93 | 13.72 |
Source: MFI, Data as on 06th June 2016
Outlook
So far MNCs have grown manifold and have become a major force. As the country evolves further into a global business hub, MNCs are likely to become an increasingly important part of the economy. In spite of growth of home grown companies in terms of corporate governance, factors like global presence, ability to deliver newer solutions to an ever-evolving market, continuous investment in R&D, competitive advantage, technical knowhow and access to capital markets at global scale continue to give an edge to the MNC stocks.
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