MNCs eye bigger share in India units to tap growth - Economic Times

MUMBAI: Multinational companies (MNCs) are increasing their control over their Indian subsidiaries to capture the higher growth potential of Asia's third largest economy.

On Monday, London-listed GlaxoSmithKline Plc, announced an open offer which, if successful, will raise its stake in its Indian unit, GlaxoSmithKline (GSK) Pharmaceuticals from 50.7% to 75% - the maximum limit as per the Sebi norms. GSK Plc has offered to pay 3,100 per share, a 26% premium to Friday's closing price.

In July this year, Unilever Plc hiked its stake by 14.8% to 67.28% in Hindustan Unilever ( HUL), its Indian unit, spending Rs 19,188 crore.

Early this year, GlaxoSmithKline Plc increased its stake from 43.2% to 72.46% in GSK Consumer, which sells the famous Horlicks brand, investing a total of 4,805 crore. In August, McGraw Hill Financial, the owners of global rating agency Standard & Poor's (S&P) increased their stake in India's leading credit rating company Crisil from 67.8% from 52.8%, investing Rs 1,290 crore.

"MNCs would look to raise the stake in their Indian subsidiary as emerging markets display higher growth and start accounting for a larger share of their global business," says Ravi Sardana, EVP-investment banking, ICICI Securities. "The present weakness in the rupee provides an opportune time for increasing their stake".

Analysts say more MNCs may move to raise their holdings in their Indian arms to 75% in the next few months. These may include Nestle, Maruti Suzuki, Ranbaxy, Colgate, Cummins and Proctor & Gamble, according to market sources.

"Many MNCs have lots of cash in their balance sheet. If this cash is invested in fixed deposit or any other instruments in the US or Europe, it will give them a tiny return. In contract, if they invest in their Indian subsidiaries, that will earn them a return on equity in excess of 20%," says Manishi Raychaudhuri, managing director and head of research, BNP Paribas Securities India.

Nestle Global, for instance, is sitting on $10 billion in cash whereas Pfizer, which recently announced the merger of its two Indian subsidiaries Pfizer & Wyeth, has accumulated cash of over $ 33 billion in its balance sheet. The contribution of emerging market to sales has been increasing. Maruti Suzuki, for instance, is contributing 40% of Suzuki Motors sales.

"The yield on investment in the Indian business of an MNC is likely to increase with better growth and higher dividend payout ratios if the parent company increases its holding," says Manishi Raychaudhuri of BNP Paribas.

The sharp depreciation in the Indian currency is another incentive for an MNC to raise their holding in its Indian subsidiary. The rupee has depreciated nearly 13% so far this year, though it has recovered after hitting a low of Rs 68.83 on August 28. It closed at Rs 61.75 to the dollar on Monday.

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