Ambit Strategy Thematic DebunkingtheMNCpremium 07aug2015

STRATEGY
August 2015
Debunking the MNC premium

Analysts:
Nitin Bhasin
nitinbhasin@ambitcapital.com
Tel: +91 22 3043 3241
Saurabh Mukherjea, CFA

saurabhmukherjea@ambitcapital.com
Tel: +91 22 3043 3174
Gaurav Mehta, CFA

gauravmehta@ambitcapital.com
Tel: +91 22 3043 3255
Karan Khanna
karankhanna@ambitcapital.com
Tel: +91 22 3043 3251
Consultant: Anupam Gupta

anupam.gupta@aavanresearch.com
Strategy
CONTENTS
Debunking the MNC premium 3
Section 1: Rise of the MNC premium.4
Section 2: Ranking the MNC universe 11
Section 3: Is the MNC premium sustainable?.............................................. 13
Appendix 1: Case studies from our Listed MNCs - 18
The good, the bad and the ugly report
August 07, 2015
Ambit Capital Pvt. Ltd.
Page 2
Strategy
THEMATIC
August 07, 2015
Debunking the MNC premium

Over the past five years, the valuation premium associated with Indias
top-25 MNC stocks has doubled without any major change in their
fundamentals. We believe a 2.5x premium relative to the Sensex for
these stocks is unsustainable. An improvement in Indias economic
growth trajectory will raise competitive intensity and reduce RoEs, even
for MNCs. Sustained hostility towards minority shareholders will also
limit the premium that these MNCs command. Our proprietary filter for
Indias top-25 MNC stocks raises RED flags for ABB India, 3M India,
P&G Hygiene, Ambuja Cement, Maruti Suzuki, Alstom T&D and Siemens
India. Out of these, we believe ABB India, Alstom T&D and Siemens
appear to be particularly exposed, as their valuations are not
connected to their earnings growth.
The rise of the MNC premium
Over the past five years (FY10-15), the premium, in P/E terms, of Indias top25 MNC stocks to the Sensex has doubled to 2.5x. In terms of evolution of
market-cap of these stocks, 63% is attributable to P/E multiple expansion whilst
only 27% is attributable to earnings growth. Subjective factors driving P/E
multiple expansion include the scarcity premium, the delisting theme and
more recently the safety trade. We do not see these factors playing a major
role in the future.
Ranking the MNC universe
Investing in MNC stocks remains a rewarding theme in India. Using our
proprietary filters, our analysts back six stocks in which we have a high-level of
confidence with regards to the safeguarding of minority interests: Kansai
Nerolac, CRISIL, Oracle Financials, GSK Pharma, GSK Consumer and Gujarat
Pipavav. Out of the remaining 19, we have RED flags for ABB India, 3M India,
P&G Hygiene, Ambuja Cement, Maruti Suzuki, Alstom T&D and Siemens India.
Among these RED-flagged companies, we believe ABB India, Alstom T&D and
Siemens seem particularly exposed, as their valuations are apparently
disconnected to their earnings growth.
Is the MNC premium sustainable?
Over the next couple of years, the Indian economy should gain momentum.
Whilst MNCs will benefit from this, given the historical trends, this growth could
be captured within unlisted subsidiaries at the cost of minority shareholders.
Further, cross-country data suggests that as countries become richer, RoEs
decline in the face of rising competitive intensity. With risks on growth and
corporate governance, a sustained rise of the MNC premium is unlikely.
Top-25 MNCs overall results

Company name
Final verdict
Kansai Nerolac
GREEN
CRISIL
GREEN
Oracle Fin Serv
GREEN
GlaxoSmith Pharma
GREEN
GlaxoSmith C H L
GREEN
Gujarat Pipavav
GREEN
Nestle India
AMBER
Castrol India
AMBER
Blue Dart Express
AMBER
WABCO India
AMBER
Hind Unilever
AMBER
Bosch
AMBER
ACC
AMBER
Colgate-Palmolive India
AMBER
Cummins India
AMBER
Gillette India
AMBER
Pfizer India
AMBER
Whirlpool of India
AMBER
Siemens
RED
Alstom T&D India
RED
Maruti Suzuki*
RED
Ambuja Cement
RED
P&G Hygiene
RED
3M India
RED
ABB India
RED
Source: Company filings, Ambit Capital research. Note:

*Ambit has a Bottom-up BUY on Maruti Suzuki. We arrive
at these rankings using seven qualitative and
quantitative filters that grade these MNCs on minority
friendliness. Flags are in order of importance; a RED flag
signals a significant concern, an AMBER flag signals a
mild concern, whilst a GREEN flag signals no major
concern.
THIS NOTE CANNOT BE USED BY THE MEDIA

IN ANY SHAPE OR FORM WITHOUT PRIOR
CONSENT FROM AMBIT CAPITAL.
Analyst Details
The MNC premium has doubled in the past five years

3.00

+91 22 3043 3174
2.50
2.00
Gaurav Mehta, CFA
1.50
+91 22 3043 3255

1.00
Jan-10
Jan-11
Jan-12
Jan-13
Jan-14
Jan-15
MNC P/E v/s Sensex P/E

Source: Bloomberg, Ambit Capital research. Note: MNC P/E is the median P/E for the Top-25 MNCs on
current market capitalisation. This chart has been plotted on a monthly basis using trailing P/Es with
earnings being 1-year trailing, consolidated, diluted earnings from continuing operations.
Karan Khanna
+91 22 3043 3251
Consultant: Anupam Gupta
anupam.gupta@aavanresearch.com
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital
may have a conflict of interest that could affect the objectivity of this report. Investors should not consider this report as the only factor in making their investment decision.
Strategy
Section 1: Rise of the MNC premium

In a bull market, one must avoid the error of the preening duck that quacks
boastfully after a torrential rainstorm, thinking that its paddling skills have
caused it to rise in the world.
Warren Buffett, letter to shareholders, 1997.
Investors preference for MNC stocks has been led by factors like superior
capital allocation, better R&D and professional management. However, over
the past five years, the MNC premium has doubled, with most of the rise
attributed to P/E multiple expansion. Thus, investors are willing to pay even
more today for the MNC tag. We track the evolution of the MNC premium
and analyse factors leading to its dizzying ascent.
MNCs A background
Multinational Companies (MNCs) have a long history in India, with some of them
like Hindustan Unilever incorporated as far back as 1933. The Foreign Exchange
Regulation Act (FERA) in 1974 restricted foreign equity participation to 40%, forcing
MNCs to raise the rest from Indian shareholders. This resulted in famous MNC exits
from India like Coca Cola, IBM and Mobil.
Since then, Indias corporate laws have become friendlier, and currently, there are
about 100 listed MNCs in India. In addition, global parent companies have now been
listed in India through acquisitions, such as Maruti Suzuki, Ambuja Cement (a part of
Holcim) and CRISIL (now majority owned by Standard & Poors, USA).
For the purpose of this report, we define MNCs as companies listed in India where
the promoter is an MNC. We then choose the 25 largest MNCs (by market
capitalisation) from the BSE500 Index and exclude United Breweries (UBL) given that
its association with Heineken is recent (Heineken became the largest shareholder in
UBL only in 2013). The final list of the Top-25 MNCs (as we will refer to them in this
report) is shown in Exhibit 1 below.
MNCs have a long history in India
From the 100-odd listed MNCs

listed in India.
we choose the top 25 by marketcap
Exhibit 1: India's top-25 MNC stocks
Hindustan Unilever Ltd
Incorporated
In
1933
Promoter
Holding (%)
67
Market Cap
(Rsbn)
1,964
Maruti Suzuki India Ltd
1981
56
1,345
Bosch Ltd
1951
71
829
Nestle India Ltd
1959
63
625
Company
Siemens Ltd
1957
75
543
Ambuja Cements Ltd
1981
50
357
Oracle Financial Services Software Ltd
1989
75
356
Cummins India Ltd
1962
51
320
GlaxoSmithKline Pharmaceuticals Ltd
1924
75
316
ABB India Ltd
1949
75
292
Colgate-Palmolive India Ltd
1937
51
276
GlaxoSmithKline Consumer Healthcare Ltd
1958
72
265
ACC Ltd
1936
50
264
Castrol India Ltd
1979
71
242
Procter & Gamble Hygiene & Health Care L
1964
71
210
Gillette India Ltd
1984
75
178
Blue Dart Express Ltd
1991
75
173
CRISIL Ltd
1987
67
143
Kansai Nerolac Paints Ltd
1920
69
138
Alstom T&D India Ltd
1957
75
137
WABCO India Ltd
2004
75
126
3M India Ltd
1987
75
118
Pfizer Ltd/India
1950
64
111
Gujarat Pipavav Port Ltd
1992
43
104
Whirlpool of India Ltd
1960
75
96
Source: Bloomberg, Ambit Capital research; Note: Market-cap as on August 06, 2015
August 07, 2015
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Strategy
Investing in MNCs has paid off
Note that the price performance of MNC stocks from the BSE500 universe has been
impressive over multiple time-frames, as shown in the exhibit below.
Exhibit 2: MNCs in general have beaten benchmarks by a large margin
CAGR
1yr
3yr
5yr
10yr
BSE500 Index
16%
23%
12%
16%
MNC universe
49%
30%
22%
21%
MNC stocks have

impressive run
had
an
Source: Bloomberg, Ambit Capital research. Note: Prices have been taken as of 21st July 2015. Hence, 1yr
performance compares price performances of BSE500 Index and Top-25 MNC stocks for the period 21st July
2014 to 21st July 2015 and so on for 3yr (2012-2015), 5yr (2010-2015) and 10yr (2005-2015) periods.
Amongst the key reasons behind these firms superior share price performance has
been the way MNCs manage cash, as highlighted in our July 31, 2013 thematic
report, The cash flow conundrum for India Inc, and in the way they bring world-class
technology and professional management methods to India. As a result, across a set
of fundamental metrics like accounting quality (as per Ambits accounting quality
framework), RoCEs and RoEs, MNCs perform better than an average BSE500 firm.
led by superior financials
Exhibit 3: Fundamentals - MNCs vs BSE500 universe

Median Accounting
Score
Median
RoCE
Median
RoE
Median Fixed
Asset turnover
BSE500 Index
192
15%
13%
1.9
MNC universe
213
21%
15%
3.5
Fundamentals
Source: Bloomberg, Company, Ambit Capital research; Note: Accounting score is median accounting score for
the MNC universe and the BSE500 index constituents using our proprietary forensic accounting framework
(click here for more details).
The surge of the MNC premium

We define the MNC premium as the excess of median price-to-earnings (P/E)
multiple of the top-25 MNC stocks to the Sensex P/E. The progress of the MNC
premium over the past five years paints a startling picture, as can be seen in Exhibit 4
below. The MNC premium has doubled to 2.5x currently, from 1.2x in January 2010.
Exhibit 4: MNC premium has doubled in the past five years
The gap in valuation between

MNC stocks and the Sensex has
widened
3.00
2.50
2.00
1.50
Jan-15
Apr-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Jul-11
Oct-11
Apr-11
Jan-11
Oct-10
Jul-10
Jan-10
Apr-10
1.00
MNC P/E v/s Sensex P/E

Source: Bloomberg, Ambit Capital research. Note: MNC P/E is the median P/E for the top-25 MNCs on current
market capitalisation. This chart has been plotted on a monthly basis using trailing P/Es with earnings being 1year trailing, consolidated, diluted earnings from continuing operations
We analysed the evolution of the market capitalisation of the top-25 MNCs to

understand the key drivers behind the surge in the MNC premium. To our surprise,
we found that the surge was led by an improvement in the perception of MNCs by
investors rather than earnings growth. Our analysis reveals that the main driver
behind the rise in the MNC premium was a huge rerating of the P/E multiple. For a
median firm, whilst 27% of the total returns could be attributed to the earnings
growth, a whopping 63% of total returns could be attributed to a valuation multiple
rerating.
August 07, 2015
P/E multiple rerating has driven the

surge in MNC premium
Page 5
Strategy
Exhibit 5: MNC market-cap evolution over FY10-15
70%
Over FY10-15, on a median basis,

a high 63% of market-cap
evolution could be attributed to
valuation multiple rerating
63%
60%
50%
40%
27%
30%
20%
10%
0%
Driven by earnings growth
Driven by P/E multiple expansion
Source: Bloomberg, Company, Ambit Capital research
We illustrate this by using the example of Colgate Palmolive. Over the past five years
(FY10-FY15), Colgates P/E rose to 49x in FY15 from 21x in FY10. Note that 21% of
this increase in P/E was attributable to earnings growth, whilst 75% was attributable
to the re-rating of the P/E multiple for the stock.
Identifying those MNC stocks where valuations are at a disconnect
Delving further into the MNC premium, we analysed stock valuations based on
traditional measures such as P/E compared with earnings growth and P/B compared
with return on equity. Our analysis reveals that MNC stocks like Blue Dart and
Gillette appear to be trading at trailing P/B valuations that are disconnected with
their average ROEs. For example: Blue Darts trailing P/B is at an astronomical 53.6x
versus an average FY09-15 ROE of just 20.3%.
Exhibit 6: Blue Dart and Gillette stand out as outliers on Trailing P/B v/s average
RoEs
R = 41%
60.0
Trailing P/B
50.0
Blue Dart
Castrol
40.0
Blue Dart and Gillette are among

MNC outliers on P/B-RoE-based
comparisons
HUL
Gillette
30.0
P&G
20.0
10.0
-
(20.0)
20.0
40.0
60.0
80.0
FY09-15 average RoE
100.0
120.0
140.0
Source: Bloomberg, Ambit Capital research
On a trailing P/E vs FY09-15 EPS CAGR, we highlight ABB India, Alstom T&D,
Siemens and Gillette where trailing P/E valuations are disconnected with earnings
growth. For example, Siemens trades at a trailing P/E of 157.2x even as its FY09-15
earnings fell at an 11% CAGR.
August 07, 2015
whilst Gillette, ABB India, Alstom

T&D, Siemens are outliers on a
P/E-earnings growth comparison
Page 6
Strategy
Exhibit 7: whilst Gillette, ABB India, Alstom T&D and Siemens are outliers on a P/Eearnings growth comparison
Trailing P/E
350
300
Gillette
200
Siemens
ABB
150
Blue Dart
100
Alstom
Pfizer
-20%
R = 36%
250
WABCO
50
GSK Consumer
-10%
0%
10%
20%
30%
FY09-15 EPS CAGR

Having established that the MNC premium goes beyond earnings-based valuations,
we now delve into subjective reasons for the existence of this premium.
Reason 1: Scarcity premium

The top-25 MNC stocks have an average free float (or stock available for trading) of
just 33% of total issued stock. Thus, the key issue here is whether the MNC Premium
is also aided by a scarcity of the underlying stock available to trade. This led us to
investigate the correlation between free-float and the rise in P/E multiples for the top25 MNC stocks. We used the change in P/E (on an absolute basis) and the
percentage change in P/E (in CAGR terms) over the past five years and checked for
correlation with the latest available free-float of the stock.
Low float of MNC stocks has

created a scarcity premium
The scatter-graphs below suggest a negative although moderate (R-squared at

0.2x) linear relationship, implying that MNC stocks with a low free-float have seen
a higher increase in P/E (both in absolute terms and in CAGR terms).
Change in P/E over FY10-15

(absolute)
Exhibit 8: Impact of low free-float on P/E change (in absolute terms)
Stocks with low free-float tend to

enjoy a higher P/E
300
R = 23%
250
200
150
100
50
10%
(50)
20%
30%
40%
50%
60%
Latest available free float
August 07, 2015
Page 7
Strategy
Change in P/E over FY10-15

(CAGR)
Exhibit 9: Impact of low free-float on P/E change (in CAGR terms)

60%
R = 21%
50%
40%
30%
20%
10%
0%
-10%
0%
10%
20%
30%
40%
50%
60%
Latest available free float
Reason 2: The safety trade

As mentioned earlier, the MNC premium is led by non-earnings-based factors such
as superior capital allocation and cash generation of these companies as well as
strong technological support from the MNC parent. These are well-known, traditional
reasons. A more recent trend, however, is the rise of the safety trade, as highlighted
in our July 21, 2015 thematic report Are investors over-paying for the shelter of
earnings visibility?. As markets have continued to inch higher, the market positioning
has stayed decisively defensive for the most part of the last five years and even in the
current rally since September 2013 (barring a three-quarter period from Sep13 to
Jun14).
Investors have flocked to safe,

defensive stocks in the current rally
that began in September 2013
Exhibit 10: Inflows into equity mutual funds have accelerated even in the wake of
intensifying downgrades of Sensex earnings estimates
150
1,800
1,780
1,760
1,740
1,720
1,700
1,680
1,660
1,640
1,620
1,600
120
90
60
30
Net MF equity inflows* (Rs bn, LHS)
Jun-15
May-15
Apr-15
Mar-15
Feb-15
Jan-15
Dec-14
Nov-14
Oct-14
Sep-14
Aug-14
Jul-14
Jun-14
May-14
Whilst
consensus
has
been
downgrading its Sensex earnings
estimates, retail inflows into equity
mutual funds have accelerated
Consensus FY16 Sensex EPS estimate (Rs, RHS)
Source: Bloomberg, AMFI website, Ambit Capital research. Note: * Assumes 60% of balanced allocation as
equity; these numbers also include allocation to equity arbitrage schemes. This exhibit has been reproduced
without any changes from our July 21, 2015 note: Are investors overpaying for the shelter of earning visibility?
August 07, 2015
Page 8
Strategy
Exhibit 11: As a result, money flow into the safety trade has continued
1
9000
0.9
8000
0.8
7000
0.7
Bear
6000
0.6
5000
0.5
4000
0.4
Bull
3000
0.3
0.2
2000
0.1
1000
0
Nifty
Mar-03
Jun-03
Sep-03
Dec-03
Mar-04
Jun-04
Sep-04
Dec-04
Mar-05
Jun-05
Sep-05
Dec-05
Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
Jun-07
Sep-07
Dec-07
Mar-08
Jun-08
Sep-08
Dec-08
Mar-09
Jun-09
Sep-09
Dec-09
Mar-10
Jun-10
Sep-10
Dec-10
Mar-11
Jun-11
Sep-11
Dec-11
Mar-12
Jun-12
Sep-12
Dec-12
Mar-13
Jun-13
Sep-13
Dec-13
Mar-14
Jun-14
Sep-14
Dec-14
Mar-15
Jun-15
Source: Ambit Capital research. Note: Grey/red colour bars represent the proportion of bullish/defensive factors working during the quarter. For example, in the
end of the Jun15 quarter, nearly 80% of the factors working were defensive. This exhibit has been reproduced without any changes from our June 03, 2015 note:
Style-based long and short ideas.
Case Study: The Consumer Staples sector

One such distortion, resulting from the safety trade, we believe, has been investors
flocking into stocks that offer the safety of high earnings visibility. As a result, several
of these stocks have been rerated to insane levels.
Based on our bottom-up coverage, one such pocket that has been rerated is the
Consumer Staples space. We highlight that four of these seven stocks are MNCs.
With an average earnings growth expectation of around 15-16% over the foreseeable
future, most of these stocks have rerated to trade at valuations of mid-to-high 30s on
two-year forward earnings. Needless to say, we are SELLers on the entire universe
(ex-ITC), as we believe that there is no logical case for making money over the next
12-24 months by buying these stocks at these valuations.
Consumer Staples is one space that

has benefited from the flight to
stocks with high earnings visibility
Exhibit 12: Two-year forward P/Es for frontline FMCG companies

Ticker
Company Name
NEST IN
Nestle India Ltd
FY15-17E EPS
CAGR
FY17E P/E
12%
41.6
HUVR IN
Hindustan Unilever Ltd
18%
37.7
DABUR IN
Dabur India Ltd
17%
35.1
BRIT IN
Britannia Industries Ltd
18%
46.8
CLGT IN
Colgate Palmolive (India)
14%
36.9
MRCO IN
Marico Ltd
25%
31.1
SKB IN
Glaxosmithkline Consumer Healthcare Ltd
14%
34.8
The safety trade is now set to unwind

As further highlighted in our July 21 note, whilst stocks with strong earnings stability
perform well in general, they fail to deliver in a normal macro environment. The
performance of quintiles constructed on the basis of stability in past earnings growth
suggests that during periods characterised by economic normalcy, stocks with high
stability have actually been the worst performers.
Exhibit 13 below plots the share price performance of the five quintiles on stability in
past earnings from May-03 to Dec-07 (i.e. until the peak of the bull run). Over this
period, whilst Q1 (i.e. stocks with lower stability in past earnings) delivered the best
returns with a CAGR of 64%, Q5 was the worst performer with 49% CAGR returns.
August 07, 2015
Stocks with strong earnings stability

fail to deliver in a normal macro
environment
Page 9
Strategy
Exhibit 13: Performance of earnings stability quintiles during the bull phase
Q1
CAGR
64%
Q3
63%
Q2
58%
Q4
55%
Q5
49%
Stocks with lower stability delivered

the best returns with a CAGR of
64%
Dec-07
May-07
May-06
May-05
May-04
May-03
1,000
900
800
700
600
500
400
300
200
100
0
Source: Bloomberg, Ambit Capital research Note: The above exhibit plots the growth of `100 invested in each of
the five quintiles on earnings stability, from May-03 to Dec-07 (i.e. over the previous bull phase). Q5 (Q1) is the
quintile with the most (least) stable earnings.
Similarly, in the one-year period between May 2013 and May 2014 when the market
rally was characterised by hopes of an economic recovery, low-stability (low-visibility)
stocks yet again outperformed whilst their high-stability (high-visibility) counterparts
underperformed (with Q1 delivering returns of 32% over the year vs 23% delivered by
Q5).
To reiterate, MNC stocks have benefited from this safety trade and, as Indias
economic growth reverts to a normal macro environment, this trade is likely to
unwind.
Reason 3: The delisting play

The prospect of a foreign parent delisting its Indian subsidiary remains a key play on
MNC stocks. A Mint news article reported that 14 MNCs (including Unilever and
GlaxoSmithKline) came up with open offers to raise their stakes in their Indian units
in FY14 (until 5 March 2014), up from nine in the previous fiscal. Seven MNCs
announced their intention to delist their local businesses, with one completing the
process. (Source: http://goo.gl/aUoSDr). In March 2015, SEBI notified new
regulations aimed at reducing the time taken to complete the delisting process as
well as providing for relaxation of norms on a case-to-case basis. Currently, a
successful delisting requires that at least 25% of public shareholders participate in the
reverse book-building process.
From the perspective of the foreign parent, we highlight that the Indian-listed arm is
still too small to make a meaningful impact by delisting. For our sample set of top-25
MNC stocks, note that on a median basis, the share of the Indian listed company is
merely 2% of post-tax profits and 8% of market capitalisation of its foreign parent. On
an average basis, the numbers are higher (mainly due to Maruti Suzuki, Kansai
Nerolac and Ambuja Cement) but not materially 8% of profits and 15% of market
capitalisation. Hence, even assuming Indias growth story continues in the coming
years, the Indian-listed companies are still too small for foreign parents to buy-out
and de-list.
Delisting prospects can also play a

role in the valuations of an MNC
stock
India remains small from

global parents perspective
the
Exhibit 14: Indian operations still not meaningful enough for global parent
Indian listed company profits as a
percentage of their global MNC
parents profits
India-listed MNC
market-cap to global listed MNC
market-cap
On an average basis
7.8%
15.0%
On a median basis
1.9%
7.9%
Source: Bloomberg, Ambit Capital research. Note: Indian listed company profits are for FY15; Global MNC
parent profits are for 2014.
Thus, we believe that delisting is, at best, a flavour-of-the-month theme that comes
and goes with rumours on delisting-related regulation. We do not ascribe any
meaningful permanence to this aspect in the valuation of MNC stocks in general.
In the next section, we rank the top-25 MNCs on Ambits proprietary framework to
understand the justification of their valuation premium.
August 07, 2015
Page 10
Strategy
Section 2: Ranking the MNC universe

"We made too many wrong mistakes."
- Yogi Berra on why the Yankees lost the 1960 baseball series (2003)
Rather than paint all the MNC stocks with a single brush, we screen our
sample set for their minority friendliness. Only six of Indias top-25 largest
MNC stocks Oracle Fin, GSK Pharma, GSK Consumer, CRISIL, Kansai
Nerolac and Gujarat Pipavav make it through our proprietary framework.
Investors should therefore question the premiums commanded by the seven
stocks that score a Red flag on our screen.
Only six of Indias top-25 largest

MNCs make it through our filter
A framework for sifting through MNC stocks

Given their advantages of superior technology and management quality, as well as
proven track record on capital allocation, we believe MNCs will continue to
differentiate themselves over domestic companies. Moreover, investing in MNC stocks
has been a rewarding experience, as highlighted in Exhibits 3 and 4, in Section 1.
Painting all MNC stocks with the

same brush would be unfair
We believe that minority-friendliness is a key factor on which MNCs can distinguish

themselves. Past experience, however, is less than inspiring. We dealt with this issue
in depth in our March 07, 2014 thematic report, Listed MNCs - The good, the bad &
the ugly. In this report, we created a framework for investors to rank MNCs on
minority-friendliness. We now repeat this framework to rank our universe of Indias
top-25 MNC stocks.
Minority-friendliness is a key factor

for ascribing an MNC premium
These rankings should help investors address the non-earnings-based factors in

general and minority-friendliness in particular, which add to the MNC premium.
Our MNC screener consists of the following parameters:
Royalty and related payments as a percentage of sales

We rank the various MNCs based on their five-year median royalty and related
payments as a percentage of net sales over FY10-14. The rationale is to penalise
firms which have made the highest royalty payments to their foreign parent.
MNCs with royalty & related payments more than 4% of sales get a RED flag,
those with royalty & related payments between 0.7% and 4% of sales get an
AMBER flag, and those with royalty & related payments less than 0.7% of sales
get a GREEN flag.
CAGR in royalty and related payments vs CAGR in net sales

Here we rank the various MNCs based on CAGR in royalty and related payments
vs CAGR in net sales over the last five years (FY09-14). We choose to look at the
FY09-14 period because the Government had relaxed its norms pertaining to
royalty payments in FY10. The rationale is to penalise firms which have shown
higher growth in royalty & related payments in comparison to their sales growth.
MNCs where the ratio of CAGR in royalty & related payments to CAGR in net
sales is more than 2x get a RED flag, those between 1x-2x get an AMBER flag
while those with <1x get a GREEN flag.
Dividend payout history

We rank the various MNCs based on their five-year median dividend payout
ratios over FY10-14. The rationale is to penalise firms that have had a relatively
stingy dividend payout history whilst rewarding firms which have been generous
in rewarding their shareholders. Those MNCs where dividend payout is less than
10% of post-tax profits get a RED flag, those with dividend payout of between 1040% of post-tax profits get an AMBER flag while those with dividend payout
greater than 40% get a GREEN flag.
August 07, 2015
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M&A transactions with group companies

With the intention of penalising firms that have indulged repeatedly in M&A
transactions with group companies (as this raises suspicion regarding the intent
and consequently the appropriateness of valuations at which these deals are
struck), we look at the last ten years of M&A activities for these firms. Hence,
those MNCs with multiple M&A transactions get a RED flag, those MNCs where
M&A transactions are not that frequent get an AMBER flag and those with no
M&A transactions or M&A transactions that are not that material get a GREEN
flag.
Competing unlisted subsidiaries

Whilst the rationale of setting up another subsidiary in addition to the listed
subsidiary is often not clear, on the face of it this also implies a loss of an
opportunity for the local listed subsidiary. We look at operations of other unlisted
subsidiaries of these foreign parents in India. The rationale is to penalise firms
where the foreign parent has operations outside the listed entity in competing
lines of business. MNCs are given RED, AMBER or GREEN flag depending upon
the size and nature of business of the unlisted subsidiaries.
Depressed share prices around open offers

We look at the last ten years of open offer history for these MNCs to identify
instances where share prices may have been suppressed before the
announcement of these open offers. We penalise firms whose share prices
declined by 10% or more over the previous three months or six months before the
open offer announcement. Hence, MNCs where the stock price has declined by
10% or more in either the preceding three month period or the preceding six
month period get a RED flag, otherwise they get a GREEN flag.
CEO incentivisation
We rank the various MNCs based on incentives received by the CEO. An incentive
structure that aligns local management deliverables with the local shareholders is
superior to one based on share of profits of the parent or share plans linked to
the global parent. If remuneration is linked to earnings of the global parent, the
CEO would be more interested in boosting profits of the global parent than the
Indian subsidiary. Thus, MNCs where the local senior management get stock
options that are linked to the global parent but not the local MNC get a RED flag.
In case of MNCs where the local senior management get stock options in both
the global parent as well as the local MNC, we give an AMBER flag. Finally, we
assign a GREEN flag if the local senior management gets stock options in the
local MNC but not the global parent, or the local senior management does not
get any ESOPs.
Methodology: We allot RED, AMBER and GREEN flags to the response on each of
the seven issues. Flags are in order of importance; a RED flag signals a noticeable
concern, an AMBER flag signals a mild concern, whilst a GREEN flag signals no
major concern. RED flags get a score of zero, AMBER flags get a score of one and
GREEN flags get the highest score of two. Thus, for the seven parameters in our
framework, scores are between 0 and 14.
August 07, 2015
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Tying it all together
After considering the seven parameters discussed in the previous section, the
consolidated results have been shown in Exhibit 15 below.
Exhibit 15: Top 25 MNCs overall results
Company name
Royalty & related Royalty & related

Dividend
Competing Depressed share price
payments(1) as a
payments(1)
M&A
CEO
Final
Payout
unlisted
before open offer
incentivisation Verdict
%
CAGR/
transactions
Subsidiaries
announcement?
(3)
of sales
Net sales CAGR
Kansai Nerolac
Green
Green
Amber
Green
Green
Green
Green
Green
CRISIL
Green
Green
Green
Green
Green
Red
Green
Green
Oracle Fin Serv
Green
Green
Red
Green
Green
Green
Green
Green
GlaxoSmith Pharma
Green
Green
Green
Green
Green
Green
Red
Green
GlaxoSmith C H L
Amber
Green
Green
Green
Green
Green
Red
Green
Gujarat Pipavav
Green
Green (2)
Red
Green
Amber
Green
Green
Green
Nestle India
Red
Green
Green
Green
Green
Green
Red
Amber
Castrol India
Amber
Amber
Green
Green
Green
Green
Red
Amber
Blue Dart Express
Green
Green
Red
Green
Red
Green
Green
Amber
WABCO India
Green
Red
Red
Green
Green
Green
Green
Amber
Hindustan Unilever
Amber
Red
Green
Green
Green
Red
Green
Amber
Bosch
Red
Amber
Amber
Green
Amber
Green
Green
Amber
ACC
Amber
Red
Green
Green
Green
Green
Red
Amber
Red
Amber
Green
Green
Green
Green
Red
Amber
Colgate-Palm
Cummins India
Amber
Amber
Green
Green
Amber
Green
Red
Amber
Gillette India
Amber
Red (2)
Green
Green
Green
Green
Red
Amber
Pfizer India
Green
Amber
Amber
Amber
Green
Green
Red
Amber
Whirlpool of India
Amber
Green
Red
Green
Green
Green
Red
Amber
Siemens
Green
Green
Amber
Red
Green
Red
Amber
Red
Alstom T&D India
Amber
Red
Amber
Green
Green
Green
Red
Red
Red
Amber
Red
Amber
Amber
Green
Green
Red
Amber
Red
Amber
Red
Green
Green
Amber
Red
Maruti Suzuki India*

Ambuja Cements
Procter & Gamble Hygiene
Red
Green
Amber
Green
Red
Green
Red
Red
3M India
Red
Red
Red
Green
Green
Green
Red
Red
ABB India
Red
Red
Amber
Amber
Green
Red
Green
Red
Source: Company, Ambit Capital research. Note: * Ambit has a bottom-up BUY on Maruti Suzuki. (1) Royalty & related payments includes the following nature of
payments: Royalty, payments towards general license fees, Training & technical consultancy fees, License agreements, Trademark fees, Fees for availing IT,
engineering, management & other services, Corporate management fees and fees for technical know-how. (2) CAGR in royalty & related payments vs CAGR in net
sales has been calculated over FY10-14 as the same could not be calculated over FY09-14. (3) Dividend payments include both interim as well as final dividend.
We rank the overall score and the key reasons driving them in the exhibit below.
August 07, 2015
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Exhibit 16: Ranking and rationale behind MNC scores
Company name
Score
Flag level
Kansai Nerolac
13
GREEN
CRISIL
12
Oracle Fin Serv
Key reasons
FY16 P/E
FY16 P/B
Scores well across most of the parameters, room for improvement

on dividend payout
37.1
7.3
GREEN
Scores well across all the parameters; but misses on share price
performance pre-open offer
48.2
15.1
12
GREEN
Among best capital allocators but loses on low dividend payout
25.5
8.3
GlaxoSmith Pharma
12
GREEN
Generous dividend payout, no royalty payment, but misses on

CEO incentivisation
52.0
16.3
GlaxoSmith C H L
11
GREEN
Strong track record on capital allocation but misses on CEO

incentivisation
37.6
10.6
Gujarat Pipavav
11
GREEN
Promoter has proven track record but Indian arm slips on

dividend payout
24.4
4.7
Nestle India
10
AMBER
High royalty and royalty related payments; also misses on CEO

incentivisation
55.4
20.9
Castrol India
10
AMBER
Misses on CEO incentivisation; AMBER flags on royalty and

royalty related payments
37.1
42.6
Blue Dart Express
10
AMBER
Misses on dividend payout and significant revenues in unlisted

subsidiaries in similar line of business
80.6
23.1
WABCO India
10
AMBER
Growth in royalty and related payments has outpaced sales

growth; low dividend payout
60.8
12.0
Hind Unilever
AMBER

growth; depressed share price pre-open offer
43.0
42.8
Bosch
AMBER
High royalty and royalty related payments as a percentage of

sales; AMBER flags on growth in royalty and royalty related
payments v/s growth in net sales and dividend payout
56.9
9.7
ACC
AMBER

growth; also misses on CEO incentivisation
27.9
3.1
Colgate-Palm
AMBER
High royalty and royalty-related payments; also misses on CEO

incentivisation
43.6
30.4
Cummins India
AMBER
Misses on CEO incentivisation; AMBER flags on royalty and

royalty-related payments as well as on competing unlisted
subsidiaries
36.6
10.1
Gillette India
AMBER

growth; also misses on CEO incentivisation
343.2#
27.4#
Pfizer India
AMBER
Misses on CEO incentivisation; AMBER flags on high growth in

royalty payments and low dividend payout
37.8
6.3
Whirlpool of India
AMBER
Low dividend payout; also misses on CEO incentivisation
37.4
8.5
Siemens
RED
RED flags on M&A transactions and depressed share price before

open offer
72.0
9.7
Alstom T&D India
RED
RED flags on growth in royalty and related payments outpacing

sales growth and CEO incentivisation
61.9
9.4
Maruti Suzuki*
RED
RED flags on royalty and related payment and AMBER flags on

growth in royalty payment, M&A transactions and unlisted
subsidiaries
26.0
4.8
Ambuja Cem
RED
RED flags on growth in royalty and related payments outpacing

sales growth and M&A transactions
25.1
2.9
P&G Hygiene
RED
RED flags on royalty and related payment, competing unlisted

subsidiaries and CEO incentivisation
65.4
17.8
3M India
RED
RED flags on royalty and related payments (including high growth

in these payments), low dividend payout and CEO incentivisation
107.5#
14.4#
ABB India
RED
RED flags on royalty and related payments (including high growth

in these payments) and depressed share price pre-open offer
94.5
9.7
Source: Company, Bloomberg, Ambit Capital research. Note: * Ambit has a bottom-up BUY on Maruti Suzuki. # indicates this is on a trailing basis since FY16
estimates are no available.
August 07, 2015
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Section
3:
sustainable?
Is
the
MNC
premium
But it remains the case that you know what is wrong with a lot more
confidence than you know what is right.
- Nassim Nicholas Taleb in The Black Swan: The Impact of the Highly Improbable
(2007)
Indias upcoming phase of reform-led growth will not materially expand the
MNC premium. MNCs have shown ways to capture this growth outside the
listed Indian arm. Moreover, the experience of other countries tells us that as
countries become richer, competitive intensity rises and RoEs gradually
decline. Both these factors will restrict if not reduce the MNC premium in
the future.
MNC premium could materially

decline from the current inflated
levels
India The beginning of a new economic growth path

In our March 11, 2014 thematic report, Investing into Indias Fourth Wave, we made
a case for the beginning of a new era of economic growth for India, led by the
change in the ruling Government. In our March 23, 2015 thematic report,
Modi hits the reset button, we posited that this new phase of structural reform will be
led by three key resets: (1) Shifting Indias savings landscape away from gold and
land towards the formal financial system; (2) Disrupting crony capitalism in India; (3)
Re-defining Indias subsidy mechanisms.
The fourth wave of economic

growth in India has just begun
However as experience from Britain, Indonesia and pre-liberalised India shows

structural reforms cause short-term pain, before economic growth gains momentum.
We have delved into this issue in depth in our July 30, 2014 thematic report,
Maggie, Manmohan and Modi: How structural reformers change economies. This
trajectory in economic growth is captured in the exhibit below.
Structural reform comes with initial

pain
Exhibit 17: How structural reforms drive up growth rates in the long term
Country/Period
Britain under Margaret Thatcher (1979-90)
India (1991-02)
Indonesia (1997-06)
Average GDP Growth

First year (1980): -2%
Subsequent years (1982-90): 3%
First year (1991): 1%
First year (1997): -13%
The future of the MNC premium

The increase in Indias economic growth over the long term will benefit both domestic
companies and MNCs in India. However, we believe that the MNC premium will not
sustain at the currently prevalent astronomical levels in the future except for those
MNCs with a commitment to high standards of corporate governance and minorityfriendliness. For the remaining companies marked Red in our rankings in Section
2 we delve into the reasons why their exorbitant premiums could decline.
Reason 1: MNCs have shown ways to grow business in India but outside the
listed entity.
Growth opportunities might be captured by the MNC but not within the listed arm. In
the past, there have been instances where a foreign parent decides to set up other
subsidiaries in addition to the local listed subsidiary. Whilst the rationale of setting up
another subsidiary is often not clear, on the face of it this also implies a loss of an
opportunity for the local listed subsidiary.
August 07, 2015
MNCs can capture growth outside

the listed Indian company
Page 15
Strategy
In the exhibit below, we list those MNCs that have unlisted subsidiaries in India and
we compare their FY14 revenues.
Exhibit 18: Comparison of listed and unlisted arms of select MNCs
Gujarat Pipavav Port*
Revenues of unlisted group companies as a percentage of listed

subsidiaries (for FY14)
382%
P & G Hygiene & Health Care
270%
Blue Dart Express
247%
Oracle Fin Serv Sw.
177%
Cummins India
73%
Bosch
55%
Source: Company, Bloomberg, Ambit Capital research. Note: *APM Terminals (i.e. the holding company of
Gujarat Pipavav) also operates the Gateway terminal at Nhava Sheva and other logistics business and does
container transportation which does not compete with Gujarat Pipavav Port.
As seen above, not all of the top-25 MNCs have unlisted subsidiaries. However, in
high-profile cases, investors have raised concerns when MNCs resort to route
business through unlisted subsidiaries.
Case study 1: Maruti Suzuki
What was proposed?
On January 28, 2014, the Board of Maruti Suzuki approved the implementation of
the expansion of its Gujarat plant through a 100% Suzuki subsidiary. As per the terms
of the contract, the plant would be operated by Suzuki Motors Gujarat Pvt Ltd
(SMGPL), a wholly-owned subsidiary of Suzuki Motor Corporation (SMC); and Maruti
would only make payments towards the cost of production plus adequate cash
necessary to meet incremental capex requirements. The land for the project would be
leased by Maruti to the wholly-owned subsidiary, which would then make lease
payments, determined at an arms length basis, for the use of land.
The move to set up Suzukis 100% subsidiary raised several concerns
As highlighted by our Auto analyst, Ashvin Shetty, in his January 29, 2014 note
(click here for the detailed note) and followed up with 13th February 2014 note A
new passage to India? (click here for the detailed note), the proposal to set up a
separate subsidiary for the Gujarat plant raises several concerns such as:
Rationale for this unusual move of setting up a separate Suzuki subsidiary is not
clear.
Being a private limited company, the cost of production would not be known.
Whilst Maruti prefers sourcing raw materials locally, it is unclear whether the
wholly owned subsidiary would rely on imports or prefer localisation.
As a result of the arrangement, Maruti would only be earning the
selling/distribution margins on vehicles manufactured at the Gujarat plant.
Whilst capex for the initial phase would be incurred by SMC, capex for future
phases would be indirectly funded by Maruti (given that Maruti would be making
payments for incremental capex requirements).
Some positive steps taken by the company to address the above concerns
Marutis stock price declined over 8% on the day of the announcement of the project
(January 28, 2014) and in subsequent months, institutional investors opposed the
proposal (Read news article: http://goo.gl/w9x6A1).
The company took some steps to address the above investor concerns. In March
2014, the Board of the company significantly altered the terms of the above
arrangement with Suzuki. The key changes were:
a) Vehicle pricing at cost vs earlier cost plus mark-up: Compared with the
earlier announcement of cost plus mark-up, the revised terms stated that the
pricing of vehicles from WoS to Maruti would only include only the cost of
production including depreciation.
August 07, 2015
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b) Transfer of assets at book value: Compared with the earlier
announcement, which stated that the assets of WoS (if the agreement is
terminated) would be transferred to MSIL at 'fair value', the new clarification given
by the management indicated that it would be transferred at 'book value'.
c) The board also decided to seek the approval of minority shareholders on the
proposal.
Current Status
Whilst the company sought to allay investor concern with various clarifications, as
discussed above, it remains firm on setting up the plant. In July 2015, Chairman, RC
Bhargava said We were hoping to do it by September but there has been some
delay in Gujaratit got delayed by a couple of months. They are yet to give the
formal approval for the SSA (state support agreement) getting transferred from
Maruti to Suzuki. We are hoping it will happen this month. And the moment that
happens, we will work out a scheduleIt will happen within this calendar year
certainly. (Source: http://goo.gl/Np9iki)
We also note that in apparent recognition of its low dividend payout, the companys
Board in Oct 2014, along with its 2QFY15 results, adopted a guideline to raise
dividend payout to 18-30% of net profits, up from the average dividend pay-out of
11.5% over FY11-14.
Our primary concerns at this point on this likely arrangement are: (i) how would the
fairness of the related party transactions would be ensured would the minority
shareholders of Maruti get an opportunity to vote on transactions between Suzuki
and its 100% owned Indian subsidiary; (ii) Impact on Marutis margin due to any
change in the level of localisation at the Gujarat plant under Suzukis 100%
subsidiary and had the plant been under Maruti?
Case study: P&G Hygiene & Healthcare
The Procter & Gamble Company, USA has three Indian entitiesP&G Home Products,
P&G Hygiene and Healthcare, and Gillette India. Out of the three companies, only
P&G Home Products is an unlisted entity. This entity comprises the detergents, hair
care and skin care businesses. Whilst the new launches made by the company are not
in the public domain, anecdotal data on P&Gs aggression in the market-place
suggests that P&G has been very active in the segments in which it operates.
Whilst P&G Home Products has seen a revenue CAGR of 24% over FY01-13, P&G
Hygiene & Healthcare has seen a revenue CAGR of only 13% over the same period.
This implies that the revenue growth of the unlisted arm has been ~1.9x the revenue
growth of the listed entity. Further, its revenue as a percentage of the listed entity has
increased from 93% in FY01 to 286% in FY13 (see Exhibit 19).
Exhibit 19: P&G Company, USA - Operations outside the listed entity in India
Growth in revenues of unlisted subsidiaries/ companies
outside the listed entity
FY2001
Revenues of unlisted group companies as a

percentage of listed subsidiaries
93%
FY2002
89%
-3%
FY2003
82%
0%
FY2004
89%
41%
FY2005
102%
36%
FY2006
143%
FY2007
184%
22%
FY2008
202%
31%
Year
16%
FY2009
165%
-2%
FY2010
233%
65%
FY2011
284%
36%
FY2012
303%
38%
FY2013
286%
23%
Source: Company, Ambit Capital research; Note: For the purpose of calculation of revenues of unlisted group entities as a percentage of listed subsidiaries, only
P&G Hygiene & Healthcare has been considered in the listed entity
August 07, 2015
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Reason 2: Rising competitive intensity will hit premium valuations
In our May 14, 2014 thematic report, Can India turn back the clock?, we argued that
better governance in India should be positive for the country, as corruption and
inflation eases and Indias competitiveness improves. However, this process will
produce not just winners but also losers i.e. companies that have benefited from the
muted competitive environment in India over the past decade. As a result, the
valuation premium that the market has been willing to pay for better-run companies
including MNCs will ERODE. On the other hand, companies which were held back
due to the high cost of capital and due to regulatory distortions stand to perform well.
Cross-country data shows that as countries become richer, RoEs decline. We expect
this impact to play out in India as well. An uptick in economic growth will raise
competitive intensity and drive operating/PAT margins lower. This, in turn, will drive
high RoEs one of the key drivers for MNC premium lower. We tracked the rise in
per capita income of Brazil, India, Indonesia, Thailand and Turkey and compared this
rise with the RoE of each countrys benchmark equity index. The results in the
exhibits below - show a trend of declining RoEs, as countries become richer.
Valuation premium that the market

has been willing to pay for betterrun companies including MNCs
will erode
The RoEs of indices tend to decline

as
Exhibit 20: RoE of Equity Benchmark Indices of countries

40.0
India
30.0
RoE (%)
Turkey
20.0
Indonesia
10.0
Thailand
CY-14
CY-13
CY-12
CY-11
CY-10
CY-09
CY-08
CY-07
CY-06
CY-05
CY-04
CY-03
CY-02
-10.0
CY-01
0.0
Brazil
14,000
countries get richer

Brazil
12,000
10,000
Turkey
8,000
6,000
Thailand
4,000
Indonesia
2,000
CY-14
CY-13
CY-12
CY-11
CY-10
CY-09
CY-08
CY-07
CY-06
CY-05
CY-04
CY-03
CY-02
CY-01
Per capita income (US$)
Exhibit 21: Per capita income (USD) trends since 2001 for select countries
India
Source: World Bank, Ambit Capital research
Reason 3: MNCs will use creative methods to remove money from the listed
entity
Finally, we repeat our core thesis from our March 07, 2014 thematic report,
Listed MNCs - The good, the bad & the ugly. MNCs can use a variety of creative
methods to short-change minority shareholders to remove money from the listed
entity. We summarise these methods below:
(1) High royalty payments
Royalty payment is perhaps the most common (and also the easiest) way in which
foreign promoters can pull out cash from their Indian subsidiaries. Higher royalty
payment (after the Indian Government removed the cap on royalty payments in
2010) has two adverse impacts. Firstly, as more and more royalty payments are made
to the foreign parent, minority shareholders have to bear the brunt in the form of
August 07, 2015
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Strategy
lower profits and lower dividend payouts. Secondly, royalty hikes have an adverse
impact for the Indian tax authorities as well. This is because whilst royalty payments
are taxed at 10%, corporate income in India is taxed at 30%.
(2) Merging unlisted entities at high valuations
In order to milk cash from their listed subsidiaries, we often find MNC parents
resorting to merging their unlisted subsidiary with the listed Indian subsidiary at
stratospheric valuations, that too without visible synergies.
(3) Transfer of profitable divisions at low valuations
In direct contrast to the point on mergers above, it is also possible that a profitable
division of the listed entity could be spun-off/transferred to the global parent at
relatively low valuations.
(4) Cash repatriation from subsidiary to parent
Ideally, cash held by the subsidiary belongs as much to the minority shareholders as it
does to the controlling shareholder. However, in recent times, we have seen how the
parent can abuse its position as the dominant shareholder to pull out cash from the
subsidiary, as the minority shareholders are not in a position to say much about it.
(5) Competing unlisted subsidiaries
There have been instances in the past where a foreign parent decides to set up other
subsidiaries in addition to the local listed subsidiary. Whilst the rationale of setting up
another subsidiary is often not clear, on the face of it this implies opportunity loss for
the local listed subsidiarys business.
(6) Business transactions with the Indian subsidiary at unfavorable terms
Another manner in which MNCs have historically short-changed minorities is by
conducting business with its local arm on favourable terms for the parent.
(7) Incentivisation of local management
An incentive structure that seeks to reward the local management by aligning their
deliverables with the shareholders of the parent and not with that of the Indian
entitys shareholders leaves room for suspicion on corporate governance.
For a summary of the case studies on how MNCs have used the above methods,
please refer Appendix 1.
Flagging off MNCs at risk
For the seven companies marked RED on our framework in Section 2, we highlight
ABB India, Siemens and Alstom T&D India as outliers on P/E vs EPS CAGR,
highlighted in Exhibit 7 above and reproduced below. With valuations clearly
disconnected with the underlying earnings, we believe these stocks are particularly
exposed, given their track record of minority-unfriendliness.
ABB, Siemens and Alstom T&D are

RED flagged as outliers that are
appear vulnerable
Trailing P/E
Exhibit 22: ABB India, Siemens and Alstom T&D are outliers on P/E vs earnings growth
Gillette
Siemens
ABB
-20%
Alstom
Pfizer
R = 36%
350
300
250
200
150
100
50
-
-10%
Blue Dart
WABCO
GSK Consumer
0%
10%
20%
30%
FY09-15 EPS CAGR

August 07, 2015
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Appendix 1: Case studies from our Listed

MNCs - The good, the bad and the ugly
report
The case studies in our thematic report, Listed MNCs The good, the bad and the
ugly, dated March 7, 2014 are summarised below. These case studies show how
MNCs have shortchanged minority shareholders in the past and it also throws light
on the common tricks that investors need to be aware of when it comes to investing
in MNCs in India.
1. Excessive royalty payments

Case Study: HUL
What was proposed?
In December 2012, Unilever Indonesia announced its plans to hike the royalty
payments made to Unilever from 3.5% to 5% (as a percentage of sales). This was
followed by HULs Board announcement in January 2013 to hike the royalty
payments in a phased manner from 1.4% to 3.15% by March 2018.
Issues with the proposal
HULs decision to hike the royalty payment raises several concerns such as:
Even though the companys volume growth had been declining over the past
several quarters, it had increased the royalty payments. Whilst peers such as
Godrej Consumers, ITC, Marico and Nestle had recorded an average three-year
and five-year CAGR in sales of 26% and 24% respectively, HULs sales growth
was much lower at 15% and 14% respectively. Given the declining market share,
the royalty hikes did not seem justified.
Growth in royalty and related payments had exceeded sales growth in three of
the last four years (see Exhibit 23). Also, whilst sales and PAT had recorded a
CAGR of 12% and 17% respectively over FY09-13, royalty payments made to
Unilever (and fellow subsidiaries) had recorded a CAGR of 31% over the same
period (see Exhibit 24). Thus, growth in royalty payments was ~2.5x and ~1.8x
the growth in net sales and PAT respectively. Such a vast difference between the
two raises concerns regarding whether the royalty/technical collaboration from
Unilever was indeed meant to help HUL or was it merely a means of siphoning
off cash by the controlling shareholder at the expense of minority shareholders.
Exhibit 23: HUL - Royalty growth has exceeded sales growth in three of the last four
years
60%
50%
40%
30%
20%
10%
0%
FY10
FY11
YoY growth in royalty
FY12
FY13
YoY growth in net sales
Source: Company, Ambit Capital Research; Note: standalone figures
August 07, 2015
Page 20
Strategy
Exhibit 24: HUL - Royalty CAGR vs net sales and PAT CAGR
(in ` mn)
FY09*
FY10
FY11
FY12
FY13
FY09-13 CAGR
Royalty & related exps
1,304
1,869
2,868
3,160
3,882
31%
PAT
19,972
22,020
23,060
26,914
37,967
17%
161,915
175,238
197,355
221,164
258,102
12%
Royalty as a % of PAT
6.5%
8.5%
12.4%
11.7%
10.2%
Royalty as a % of net sales
0.8%
1.1%
1.5%
1.4%
1.5%
Net Sales
Source: Company, Ambit Capital research; Note: standalone figures. *Data for FY09 has been annualised
As per the provisions of the Companies Act 2013, related party transactions
would require prior approval of the company by a special resolution. Further, a
member who is a related party is not entitled to vote on such special resolutions.
Thus, it could also be possible that the royalty hikes were announced before these
stringent provisions under the new Act could come into force. The Companies Bill
was passed by the Lok Sabha in December 2012.
Four months later, Unilever had announced an open offer to raise its stake in
HUL up to 75%. A royalty hike announced few months before the open offer does
not seem to be a mere coincidence (see Exhibit 25).
As a result, the royalty hike announcement, which was not in the interests of minority
shareholders, was not welcomed by investors.
Exhibit 25: HULs stock was underperforming
announcement of the open offer
120.0
the
FMCG
Index
before
the
Open offer announcement led to

shares of HUL surging 17% in a
single day's trade; before that it had
underperformed the FMCG index
110.0
100.0
90.0
80.0
Jan-13
Feb-13
HUL
Mar-13
Apr-13
BSE FMCG Index
Source: Bloomberg, Ambit Capital research; Note: Both HULs share price and BSE FMCG Index have been
rebased to 100 at the start of January 2013
The eventual outcome

In FY13, HULs royalty cost as a percentage of net sales was ~1.5%. The company
does not provide disclosures relating to the royalty payments (except in its annual
report). The impact of a ~40bps increase in royalty payment in FY14 (given that
under the new agreement, the royalty cost would increase, in a phased manner, to
~3.15% of turnover by FY18) on the YTD profits could be ~`83.7mn. Whilst by itself
it might not appear to be such a large amount, as a percentage of profits, however,
YTD profits (before tax) would have been higher by ~2.2%.
Further, Unilevers plan to raise its stake in HUL to 75% (from ~52.5% before the
open offer) received a lukewarm response from the public. The shareholders had
tendered ~320mn shares, of which valid shares tendered were ~319.6mn shares. As
a result, Unilever could only manage to raise its stake in HUL by 14.78%.
August 07, 2015
Page 21
Strategy
2. Merging unlisted entities at exorbitant valuations

Case Study: Digital Globalsoft
What was proposed?
The story dates back to April 2002, when Hewlett Packard, a US-based IT service
provider, announced its merger with Compaq in the US. Compaq held a ~51% stake
in Digital GlobalSoft, a Bangalore-based IT service provider. As a result of the
merger, HP became the controlling shareholder in Digital GlobalSoft.
In December 2002, a committee of independent directors appointed by the board of
Digital GlobalSoft had met to consider the possible merger of the software
engineering unit of HP-India Software Operation (HP-ISO) with Digital.
The merger did not appear to be in the best interests of the minority shareholders on
the following counts:
As part of the consideration, 27.8mn equity shares and 7.7mn convertible

preference shares of Digital GlobalSoft (~`18bn based on Digital GlobalSofts
market price in June 2003 immediately before the announcement) would be
issued to HP. However, news articles suggest HP-ISO was being valued at roughly
1.1x Digitals market value in spite of the fact that HP-ISOs revenues were just
over half of Digitals revenues in 2002-03 (Source: http://goo.gl/m7ouq2).
As a result of the deal, promoter holding would go up by 51% (from 50.6% to

76.2%) at the expense of public shareholders (whose holdings in the company
would get diluted by ~52%).
Out of the three divisions of HP-ISO: HP Labs, software technology centre and the
software engineering services division, only one of the three divisions, i.e., the
software engineering division, seemed to have cost synergies with Digital
GlobalSoft. (Source: http://goo.gl/RGTjwA)

In June 2003, the BoD of Digital GlobalSoft had approved the proposal of a
demerger of the HPS ISO division of HP India Software Operations with the company.
As the terms of the deal were potentially unfavourable for the minority shareholders,
Digital GlobalSofts share price fell 26% in a single days trading (see Exhibit 26).
Exhibit 26: Digital GlobalSofts share price movement under HP
950.0
BoD approves demerger of
HP-ISO division with Digital
GLobalSoft; share price
tanks 26% in a single day
850.0
750.0
HP announces
open offer; shares
surge 12%
650.0
550.0
450.0
350.0
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Digital GlobalSoft's share price

Source: Capitaline, Ambit Capital research
August 07, 2015
Page 22
Strategy
However, even before the demerger proposal could sail through, top executives from
HP had quit the company (Source: http://goo.gl/bbTqfl).
Further, in November 2003, HP announced an open offer to buy out the minority
shareholders in Digital GlobalSoft at `750/share in order to delist its equity shares
from all the stock exchanges. At this price, HP would have had to shell out ~`12.5bn
to buy out the minority shareholders. As a result, Digital GlobalSofts shares surged
12% the next day.
The delisting proposal, however, required the approval of the shareholders by a
special resolution, to sail through. Whilst the minority shareholders raised concerns
on the delisting price, the proposal could eventually receive the shareholders nod in
the EGM held in January 2004, as 20.3mn votes were cast in favour of it whilst less
than 0.1mn votes were cast against it. (Note: As the company filings are not available
on the BSE as well as NSE given that it is now delisted, this information is based on
press articles (Source: http://goo.gl/sP0DOY)). As a result, the shares were delisted in
April 2004. The price for acquisition was, however, raised to `850/share under the
reverse book-building process.
A merger announcement few months before the delisting announcement, which
resulted in a depressed share price, shows poor corporate governance on the part of
HP. The floor price under SEBI norms was `566/share. Had Digital GlobalSofts share
price not been hammered post the BoDs approval of the merger, the floor price (and
consequently the final exit price) would have been much higher.
3. Transfer of profitable divisions at cheap valuations

Case Study: Siemens India
What was proposed?
In January 2009, the Board of Siemens India had approved the divestment of its
100% stake (~6.8mn equity shares of `10 each) in its subsidiary, Siemens
Informations Systems Ltd (SISL), to Siemens Corporate Finance Pvt Ltd (SCFPL), a
100% subsidiary of Siemens AG. SISL had been valued at ~`4,490mn for the
purpose of this transfer. Earlier in November 2008 as well, the BoD had approved the
divestment of a 51% stake (~2.1mn equity shares of `10 each) in its subsidiary,
Siemens Information Processing Services Pvt Ltd (SIPS), to SCFPL.
Whilst the valuation had been determined by an independent third-party, the transfer
of SISL reflects sub-par corporate governance on the part of Siemens AG, as only
~`4.5bn was being paid for more than `9.9bn in revenues. Further, SISLs book
value in 2008 was `3.6bn.
As per Siemens BSE filings and according to its FY02 and FY03 annual reports,
Siemens had acquired a 25.2% stake in SISL in May 2003 for `0.8 bn, thus valuing
the company at ~`3.2bn (even though SISLs net worth as of September 2003 was
`1.2bn). This implies Siemens had assigned a multiple of ~2.7x to SISL at the time of
acquiring the 25.2% stake, while valuing SISL at only ~1.25x at the time of
divestment of the entire 100% stake in SISL to Siemens AG.
Further, the SISL division had seen a significant deterioration in profitability in the
immediately preceding year (see Exhibit 27).
Exhibit 27: Decline in profitability in SISL in the immediately preceding year
Year
Profit before tax (` mn)
Net Sales (` mn)
PBT margins
Sep-07
1,600
10,230
15.6%
Sep-08
730
9,940
7.3%
Source: Company, Ambit Capital Research
August 07, 2015
Page 23
Strategy
This was not the first time where a division had seen a decline in profitability
immediately before the transfer to Siemens AG. There had been multiple instances in
the past wherein the Board had approved the divestment of a particular segment in
favour of Siemens AG as part of the global alignment process. For example, in
February 2007, the Board had approved the proposal for the sale and transfer of the
Siemens Communications Enterprise Networks (COM EN) Division to Siemens
Enterprise Communications Pvt Ltd (SECPL), a 100% subsidiary of Siemens AG. The
COM EN division had been transferred on a slump sale basis, as a going concern for
a total consideration of ~`609mn w.e.f. August 01, 2007.
Likewise, in April 2007, the company had sold its entire 100% stake (12.43mn equity
shares of `10 each) in Siemens Public Communication Networks Pvt Ltd (SPCNL) to
Nokia Siemens Networks Pvt Ltd, a Nokia Siemens 50:50 joint venture company.
SPCNL was valued at `1,898mn for the purpose of this transfer.
Whilst both these proposals could get all the required clearances, both these divisions
had seen a significant deterioration in profitability before the transfer (see Exhibits 11
and 12).
Exhibit 28: The COM EN division had seen a significant
decline in profitability
Exhibit 29: as
transfer
did
SPCNL
immediately
before
the
(in ` mn)
FY06
FY07*
(in `mn)
FY06
FY07*
Turnover
Turnover
1,358
1,389
6,190
4,669
PBT
132
106
PBT
368
234
PAT
88
70
PAT
207
113
PBT margins
9.7%
7.6%
PBT margins
6.0%
5.0%
PAT margins
6.5%
5.0%
PAT margins
3.3%
2.4%
Source: Company, Ambit Capital research; Note: * Discontinued w.e.f. Aug07
Source: Company, Ambit Capital research; Note: * Sold on Apr 27, 2007
Both these issues led to investors laying serious allegations on the company relating
to corporate governance issues and tampering with financial statements (Source:
http://goo.gl/jGNAfn).
As a result, both these announcements were not welcomed favourably by the markets
(see Exhibit 30).
Exhibit 30: Both the SISL and SIPS divestments were not welcomed by the markets
120.0
Sale of SISL to Siemens AG not

viewed favourably; shares tank
~33% over 3 days
100.0
80.0
60.0
Announcement of sale of 51% in

SIPS to Siemens AG; shares
decline 17% in single day's trade
40.0
Nov-08
Dec-08
Siemens
Jan-09
BSE Capital goods Index
Source: Bloomberg, Ambit Capital research; Note: Both Siemens share price and the BSE Capital Goods Index
have been rebased to 100 at the start of November 2008

In June 2009, the company had sold its entire 100% stake (i.e., 6.8mn equity shares)
in SISL to SCFPL, for a consideration of `2,794mn, after an adjustment of `1,697mn
towards change in net assets from the valuation date up to the date of closing (i.e.
March 31, 2009). At the same time, the company had also sold its 51% equity stake
(i.e., 2.1mn equity shares) in SIPS to SCFPL, for a consideration of `228mn.
August 07, 2015
Page 24
Strategy
4. Cash repatriation from subsidiary to parent

Case study: Ambuja Cement
What was proposed?
In July 2013, the Board of Directors of Ambuja Cement unanimously approved the
proposal to amalgamate Holcim (India) Private Limited (HIPL) with the company. HIPL
is a wholly owned subsidiary of Holderind Investments Ltd, Mauritius. As a result of
the scheme, Ambuja will acquire a 50.01% stake in ACC and pay `35bn in cash and
issue incremental 433.7mn shares worth `83bn for the same to Holcim (see Exhibits
14 and 15).
Exhibit 31: From a complicated structure earlier
Exhibit 32: Holcim transfers all its holdings to Ambuja
Source: Company, Ambit Capital research

As highlighted by our analyst, Nitin Bhasin, in his July 25, 2013 note (click here for
the detailed note), the rearrangement would not result in any value creation for
Ambujas shareholders because:
The controlling shareholders stand to benefit at the expense of minority

shareholders. The rearrangement offers a raw deal for minority shareholders, as
it would result in an indirect holding in ACC.
It is difficult to decipher how the transaction in which the cash is taken from
Ambuja and replaced with investment in ACC makes the capital structure of the
standalone Ambuja entity any better.
Holcim gets to take out `35bn cash, at only the promise of some future synergies.
The synergy potential of `9bn is not likely to accrue in the near future (see Exhibit
16).
Exhibit 33: Expected synergies and benefits highlighted by the management to be extracted over the next two years
Source
Synergy/ cost benefits
Through
Our view
Supply Chain Optimisation
`3.6bn-4.2bn
Clinker swaps, cement swaps
This is a likely source of immediate benefit and with the

change in the management structure, these benefits could
accrue soon; we expect benefits of this in CY14 itself
Shared services / Fixed Costs
`4.2bn-4.8bn
Procurement; fixed cost

reduction through shared
services in back-end
processes; financial
optimisation
Our primary data sources suggest that both the companies

are already working on most of these together especially
procurement and hence we do not expect such large
benefits immediately
Total
`7.8bn-9bn
We model total benefits of `4.5bn in CY14, equally for ACC

and Ambuja and then increasing marginally every year
August 07, 2015
Page 25
Strategy
As discussed earlier, under the new norms proposed by SEBI, issuance of new shares
to the promoter or promoter group in deals involving acquisitions, mergers and
demergers would require a simple majority (i.e. 51%) of non-promoter shareholding
for passing such a resolution.
The results of the postal ballot conducted were as under:
~87% of the institutional shareholders had voted, of which ~68% had voted in
favour of the resolution whilst just over 32% had voted against the resolution.
Only ~10% of the remaining public shareholders had voted, of which ~88% had
voted in favour of the resolution whilst less than 12% had voted against the
resolution.
Thus, in spite of widespread criticism of the deal and opposition from minority
shareholders, Ambuja could get 68.5% of public shareholder votes in favour of the
deal. Post that, Ambuja had also received the EGM approval for a reduction in its
share capital. As a result of this scheme, Holcims stake in Ambuja will go up by 10%
whilst the minority shareholders stake will be diluted by over 20%.
5. Competing unlisted subsidiaries

Case study: Cummins India
What was proposed?
Cummins Inc had proposed that new technology products (i.e. products for which
Cummins India does not have the technology) would be increasingly
manufactured/exported through Cummins Technology India Ltd (CTIL), with Cummins
India retaining the India marketing rights. As a result, the stock price had corrected
by 10% (intra-day) on May 17, 2012 (i.e. the day following the day of the analyst
meeting).
On the face of it, the statement implied an opportunity loss for Cummins India in
total for the export market, and in part for the domestic market, for the products
based on this new technology.
The management made the following clarifications on the lost export opportunity:
a) No risk to current exports of Cummins India: Cummins India manufactures
and exports (to Cummins Inc) diesel engines in the range of 28, 38 and 50 litres.
Cummins Inc had decided to manufacture the 60-litre diesel engine (model QSK
60) at CTIL, which is 50% owned by Cummins Inc and 50% by Cummins Turbo
Technologies, UK, for its captive procurement. Thus, for buying diesel engines
from India up to 50 litres, it will continue to depend on Cummins India.
b) No domestic opportunity loss to Cummins India: The market size of QSK 60
diesel engine in India was engine per day as compared to 25 engines per day
for engines of 38-50 litres. Further, the management had clarified that in the
future if an opportunity arises in the domestic market for this engine on the back
of the mining sector opening up (where this engine is primarily used), Cummins
India will be open to setting up a manufacturing facility to cater to this market,
provided there is a sizeable market opportunity.
c) Companys investment in Phaltan reinforces Cummins Incs commitment
to Cummins India: At that time, Cummins India was investing capex of `1.3bn
and `2.1bn in Phaltan to cater to Cummins Inc and Cummins Indias domestic
requirement for low HP diesel gensets. Had Cummins Incs rationale been to shift
the business to CTIL, it would never have solicited Cummins India to incur such a
capex. Hence, for engines up to 50 litres, Cummins was the sole sourcing partner
for Cummins Inc as far as sourcing from India is concerned.
August 07, 2015
Page 26
Strategy
6. Business transactions with Indian subsidiary at

unfavourable terms
Case study: HP-Mphasis
What was proposed?
In June 2006, Mphasis became a subsidiary of Electronic Data Systems Corporation
(EDS). A merger agreement executed in August 2008 resulted in EDS becoming a
100% subsidiary of HP. As a result, HP also became the ultimate holding company of
Mphasis with a more than 60% stake.
Not only was HP a majority shareholder of Mphasis, it was also the single-largest
customer (see Exhibit 34). Hence, by virtue of its ownership interest as well as its
position as the single-largest customer, HP was in a significant position to dictate
terms of arrangement with Mphasis.
Exhibit 34: Mphasis - Revenues sourced through HP
Revenues derived through HP channels
(% of total revs)
40.0
Financial year
FY08*
FY09
70.0
FY10
71.0
FY11
66.0
Source: Annual filings, Ambit Capital research; Note: * 7 months ending Oct-08

Mphasis 1QFY11 results, announced in February 2011, were disappointing (see
Exhibit 35).
Whilst the company attributed this to 1Q being a traditionally weak quarter, HP was
given significant discounts, as HPs customers had demanded lower prices. Further,
the results of tier-1 IT firms over that quarter suggest that there were other factors
responsible for the weak performance in the Nov-Jan quarter (see Exhibit 36). Whilst
these firms had registered a sales growth of 25% and PAT growth of 16% on a YoY
basis, in case of Mphasis, net revenues had witnessed a growth of 3.5%, whilst profits
had shrunk by more than 15%.
(Note that Mphasis follows a Nov-Oct financial year; hence results for the Nov-Jan
quarter have been compared with the Oct-Dec results for the rest of the firms in
Exhibit 36).
Exhibit 35: Mphasis 1QFY11 results were disappointing
(in `mn)
1QFY10
1QFY11
YoY growth
Revenues
11,916
12,335
3.5%
Operating profit
2,678
2,215
-17.3%
Profit before tax
3,008
2,562
-14.8%
Profit after tax
2,683
2,267
-15.5%
Source: Company, Ambit Capital research; Note: Mphasis follows a Nov-Oct financial year; hence 1Q indicates
results for the Nov-Jan quarter
Exhibit 36: even though strong results were reported by tier-1 IT firms
(in `mn)
Revenues
PAT
Oct-Dec' 10
Oct-Dec' 09
growth (YoY)
Oct-Dec' 10
Oct-Dec' 09
growth (YoY)
Infosys
71,060
57,410
24%
17,800
15,820
13%
Wipro
78,293
69,634
12%
13,099
12,035
9%
TCS
96,634
76,485
26%
23,965
18,442
30%
HCL Tech*
16,491
12,137
36%
2,860
2,554
Average
25%
12%
16%
Source: BSE filings, Ambit Capital Research; Note: *standalone results for HCL Tech
August 07, 2015
Page 27
Strategy
As HPs interests as the largest customer took precedence over the minority
shareholders interests, Mphasis share price declined more than 28% in a single
days trading (see Exhibit 37).
Exhibit 37: Precedence of HPs interests as the largest customer over minority
shareholders interests led to a battering of Mphasis stock price
120.0
100.0
80.0
Post the Q1 results,
shares declined 28% in
a single day's trading
60.0
40.0
Jan-11
Feb-11
Mphasis
Mar-11
BSE Technology Index
Source: Bloomberg, Ambit Capital research; Note: Both Mphasis share price and the BSE Technology Index have
been rebased to 100 at the start of January 2011
7. Incentivisation of local management

Introduction
Incentivising senior management on the basis of the share of profits of the parent or
share plans linked to the global parent is indicative of poor corporate governance, as
the interests of these employees would be more aligned with the shareholders of the
global parent than the shareholders of the local subsidiary. As the remuneration
would be linked to the earnings of the global parent, these employees would be
more interested in boosting profits of the global parent than the Indian subsidiary.
On the other hand, an incentive stucture that seeks to reward the local management
by aligning their deliverables with the local shareholders makes sense not only from
the perspective of minority shareholders but also from that of other stakeholders,
notably the Government of India.
Case study: The top-15 listed MNCs
In Exhibit 38, we look at disclosures made by the top-15 MNCs in their annual
reports to understand the senior managements incentive structure.
Exhibit 38: Top MNCs - Incentivisation of local management
ABB
ACC
Ambuja Cem.
Bosch
Castrol India
Does the local senior

management have ESOPs in:
Other modes of incentivising local senior management
local-listed
global
subsidiary?
parent?
Performance-linked incentives payable to MD only; employees entitled to purchase shares of ABB Ltd, Zurich
No
No
under ABB employee share acquisition plan
No
Yes
Performance-linked incentives
Performance bonus; certain employees are also eligible for shares allotted by Holcim Ltd, Switzerland as
Yes
Yes
non-monetary perquisite
No
No
Variable bonus, taking into account company and individual performance
No
Yes
Performance-linked incentives, calculated on pre-determined parameters of performance
Colgate-Palm.
Cummins India
Glaxosmit Pharma
GlaxoSmith C H L
No
No
No
No
Yes
Yes
Yes
Yes
Performance-linked incentives, linked to performance and achievement of the company's objectives

Performance bonus based on certain pre-agreed performance parameters
Performance-linked incentives, based on achievement of overall and individual objectives
Hind. Unilever
Maruti Suzuki
Nestl India
Yes
No
No
No
No
Yes
Oracle Fin.Serv.
Yes
No
P & G Hygiene
Siemens
No
Yes
Yes
Yes
Variable pay linked to the company's performance

Performance-linked incentives
Performance-linked incentives, taking into account achievement of performance parameters
Company also administers an Employee Stock Purchase Scheme to provide equity based incentives to key
employees of the company
Performance-linked incentives based on specific targets; commission paid to WTDs
Source: Annual filings, Ambit Capital Research
August 07, 2015
Page 28
Strategy
Our findings suggest that the incentive structure of the local senior management of
ACC, Castrol, Colgate-Palmolive, Cummins, GSK Pharma, GSK Consumer,
Nestl India, P&G Hygiene and Siemens includes ESOPs of the global parent,
suggesting that their interests are also aligned to some extent to that of the global
parent. The senior management of Ambuja Cements and Siemens are entitled to
ESOPs in both the listed subsidiary as well as the global parent.
Further, whilst the senior management of ABB does not have ESOPs in the global
parent, certain employees are entitled to purchase shares of ABB Ltd, Zurich, under
the ABB employee share acquisition plan.
On the other hand, the incentive structure of the senior management of HUL and
Oracle Financial Services appears to be more closely linked to the interests of
shareholders of the local subsidiary.
August 07, 2015
Page 29
Strategy
Institutional Equities Team

CEO, Institutional Equities
(022) 30433174
Research
Analysts
Industry Sectors
Nitin Bhasin - Head of Research
E&C / Infra / Cement / Industrials
(022) 30433241
Desk-Phone E-mail
nitinbhasin@ambitcapital.com
Aadesh Mehta, CFA
Banking / Financial Services
(022) 30433239
aadeshmehta@ambitcapital.com
Abhishek Ranganathan, CFA
Midcaps
(022) 30433085
abhishekr@ambitcapital.com
Achint Bhagat, CFA
Cement / Infrastructure
(022) 30433178
achintbhagat@ambitcapital.com
Aditya Bagul
Consumer
(022) 30433264
adityabagul@ambitcapital.com
Aditya Khemka
Healthcare
(022) 30433272
adityakhemka@ambitcapital.com
Ashvin Shetty, CFA
Automobile
(022) 30433285
ashvinshetty@ambitcapital.com
Bhargav Buddhadev
Power Utilities / Capital Goods
(022) 30433252
bhargavbuddhadev@ambitcapital.com
Deepesh Agarwal
Power Utilities / Capital Goods
(022) 30433275
deepeshagarwal@ambitcapital.com
Gaurav Mehta, CFA
Strategy / Derivatives Research
(022) 30433255
Karan Khanna
Strategy
(022) 30433251
Pankaj Agarwal, CFA
(022) 30433206
pankajagarwal@ambitcapital.com
Paresh Dave, CFA
Healthcare
(022) 30433212
pareshdave@ambitcapital.com
Parita Ashar, CFA
Metals & Mining / Oil & Gas
(022) 30433223
paritaashar@ambitcapital.com
Prashant Mittal, CFA
Derivatives
(022) 30433218
prashantmittal@ambitcapital.com
Rakshit Ranjan, CFA
Consumer / Retail
(022) 30433201
rakshitranjan@ambitcapital.com
Ravi Singh
(022) 30433181
ravisingh@ambitcapital.com
Ritesh Gupta, CFA
Midcaps Chemical / Retail
(022) 30433242
riteshgupta@ambitcapital.com
Ritesh Vaidya, CFA
Consumer
(022) 30433246
riteshvaidya@ambitcapital.com
Ritika Mankar Mukherjee, CFA
Economy / Strategy
(022) 30433175
ritikamankar@ambitcapital.com
Ritu Modi
Automobile
(022) 30433292
ritumodi@ambitcapital.com
Sagar Rastogi
Technology
(022) 30433291
sagarrastogi@ambitcapital.com
Sumit Shekhar
Economy / Strategy
(022) 30433229
sumitshekhar@ambitcapital.com
Utsav Mehta, CFA
Technology
(022) 30433209
utsavmehta@ambitcapital.com
Vaibhav Saboo
E&C / Infra / Cement / Industrials
(022) 30433261
vaibhavsaboo@ambitcapital.com
Sales
Name
Regions
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E&C = Engineering & Construction
August 07, 2015
Page 30
Strategy
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Ambit Strategy Thematic DebunkingtheMNCpremium 07aug2015

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Ambit Strategy Thematic DebunkingtheMNCpremium 07aug2015

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STRATEGY

Debunking the MNC premium

Saurabh Mukherjea, CFA

Gaurav Mehta, CFA

Consultant: Anupam Gupta

August 07, 2015

Ambit Capital Pvt. Ltd.

August 07, 2015

Debunking the MNC premium

Top-25 MNCs overall results

Oracle Fin Serv

Blue Dart Express

Alstom T&D India

Source: Company filings, Ambit Capital research. Note:

THIS NOTE CANNOT BE USED BY THE MEDIA

The MNC premium has doubled in the past five years

Saurabh Mukherjea, CFA

Gaurav Mehta, CFA

+91 22 3043 3255

MNC P/E v/s Sensex P/E

Section 1: Rise of the MNC premium

MNCs have a long history in India

From the 100-odd listed MNCs

we choose the top 25 by marketcap

Exhibit 1: India's top-25 MNC stocks

Hindustan Unilever Ltd

Maruti Suzuki India Ltd

Nestle India Ltd

Ambuja Cements Ltd

Oracle Financial Services Software Ltd

Cummins India Ltd

GlaxoSmithKline Pharmaceuticals Ltd

ABB India Ltd

Colgate-Palmolive India Ltd

GlaxoSmithKline Consumer Healthcare Ltd

Castrol India Ltd

Procter & Gamble Hygiene & Health Care L

Gillette India Ltd

Blue Dart Express Ltd

Kansai Nerolac Paints Ltd

Alstom T&D India Ltd

WABCO India Ltd

Gujarat Pipavav Port Ltd

Whirlpool of India Ltd

August 07, 2015

Ambit Capital Pvt. Ltd.

MNC stocks have

Exhibit 3: Fundamentals - MNCs vs BSE500 universe

The surge of the MNC premium

The gap in valuation between

MNC P/E v/s Sensex P/E

We analysed the evolution of the market capitalisation of the top-25 MNCs to

August 07, 2015

Ambit Capital Pvt. Ltd.

P/E multiple rerating has driven the

Over FY10-15, on a median basis,

Driven by earnings growth

Driven by P/E multiple expansion

Source: Bloomberg, Company, Ambit Capital research

Blue Dart and Gillette are among

Source: Bloomberg, Ambit Capital research

August 07, 2015

Ambit Capital Pvt. Ltd.