Bank on small and mid-cap MNCs for long-term wealth creation

There are around 100 MNCs (multi-national corporations) listed in India. While four MNC stocks have a market cap of more than a lakh crore of rupees, about 80% of them have a market cap of less than Rs 20,000 crore. While 20% of these MNC stocks have given decent double-digit returns, over 40% of these stocks have fallen anywhere from 10% to over 40% in the last one year. Generally, most of the MNCs have decent balance sheet (least leveraged with relatively lower stress on the working capital management) and also have good corporate governance. Of course, in the last two decades, we have witnessed some governance issues even with these listed MNC stocks, however, the frequency of such occurrence is quite rare.

Since January 2018 peak, the overall market cap of small and mid-cap stocks has fallen by around Rs 19 lakh crore. In this meltdown, many small and mid-cap stocks from the MNC segment also saw steep erosion in their market caps. Such a meltdown in the MNC segment could possibly offer some good opportunity for wealth creation in the future. Apart from the balance sheet strength and also better governance, this segment offers the possible benefit of delisting opportunities due to meltdown in the stock prices and also over 12% fall in the exchange rate of the rupee in the last one year. This is an opportune time to get benefit out of both cheaper stock prices and the lower exchange rate of the rupee.

A majority of MNCs are owned to the extent of maximum permissible limit of 75% (equity stake). Hence, the public float for the listed MNC stocks – especially for the small-cap ones - are valued at very low levels. Nearly 70% of listed MNCs have a current market cap at less than Rs 10,000 crore. Thus, the actual public float of MNC stocks is valued at anywhere from $350 million to as low as $35 million. For many of the leading global players, such low public float in this weak market for small and mid-cap segment offers a good opportunity to convert the listed companies as wholly-owned subsidiaries.

A month ago, an MNC proposed delisting from the Indian secondary markets. Post this proposal, the management was quoted in the media that many of these MNCs do not depend on the secondary markets to get the benefits of mobilising financial resources. However, their responsibilities to fulfil the process requirements have gone up manifold and hence, they prefer to delist. This is a thought-provoking insight – smart investors, who get this insight right and also do not miss the valuation comfort and also business prospects could create significant wealth from the quality small and mid-cap MNC segment in the future.

The writer is founder and managing director, Equinomics Research and Advisory