How To Invest in MNCs?

Last Updated on Nov 7, 2022 by

Once you wake up in the morning, you come across various brands like Colgate, Nestle, HUL, etc. You have an epiphany and realize these are the global brands present everywhere. Have you ever thought of investing in such companies? If yes, then this article is for you.

To give you a brief, Multinational Companies (MNCs) have production facilities and operate in more than one country. MNCs have a significant impact on each economy of the country they operate in. You must have also come across various MNC funds. By investing in an MNC fund, investors can gain exposure to well-established businesses that have been through various business cycles and are able to surpass those efficiently.

What to check before investing in an MNC?

Here are a few points that one might consider before investing in MNCs:

Management efficiency – Efficiency and effectiveness of management provide optimum benefits to an organization. A few anecdotes that can tell you about management are:

Parent company sending its top official to lead Indian operations.
A gradual switch from conservative strategies to modern production-efficient solutions.

Valuations – A good assessment of a company’s current valuation can be made by looking at its P/E ratio.
The P/E ratio of any company gives a clear indication of whether a company is overvalued or undervalued. It is one of the most important valuation ratios. Using the P/E ratio effectively entails comparing the ratio of different companies operating in the same sector. A company having a low P/E ratio is better to invest in because it is available at a lower price and has a relatively higher earning, i.e., EPS (Earnings Per Share).

Tickertape uses a variety of methods for valuing the stock of a company so as to arrive at the most accurate possible figure. The P/E ratio is one of the most commonly used methods employed by Tickertape.

Diversification – Most MNCs have diversified operations and hence tend to be the least risky. They are very large in operation and are cash rich. They possess liquidity which in turn helps them maneuver adversities and unforeseen contingencies. They operate out of multiple countries, thus offering much-needed geographical diversification. Thus in case of supply chain disruptions or other crises, such as the gas crisis in Europe, MNCs can fare much better than other companies.

Currently, many MNCs are diversifying their production centers and setting up manufacturing units in countries like India and Vietnam after disinvesting from China. This lends a cushion to MNCs in case of adverse situations, such as the supply chain disruption in China because of continuous COVID-19 lockdowns.

Green Portfolio, one of the leading PMS and research houses in India, offers the unique opportunity to invest in MNCs through its smallcase, MNC Advantage.

This smallcase has been formulated to access companies with a global presence. This enables an investor to get his hands on global businesses that drive growth. The smallcase has only companies with a presence in more than one country. Investors would be able to invest in companies with cheaper funds and better technology to drive future growth. Simultaneously these companies would have access to global resources for better and more efficient functioning.

Only those companies with a strong balance sheet are chosen, which is made sure by picking only those stocks with low debt on books. The D/E ratio is an essential screening criterion here. Over-leveraging is the best way to sink a business and weaken its ability to adapt and capitalize on new opportunities. Hence, companies with a Debt to Equity ratio higher than 100% are avoided when making the smallcase.

Takeaway

Buying a company at the right price helps maintain a margin of safety on your investments. This helps generate higher capital appreciation. The income, market, and asset approach evaluates the company’s valuations.

Companies that have great product and service offerings are chosen. MNCs usually trade at a premium with their domestic peers. Therefore the strategy is to invest in growing MNC companies available at reasonable valuations.

This article is written by Divam Sharma, founder, and CEO of Green Portfolio and a former analyst at CitiBank, IMGC, and Kotak Mahindra Bank. Check out Green Portfolio’s smallcases.

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Divam Sharma

Divam Sharma is the founder and CEO of Green Portfolio, has formerly worked as an analyst at CitiBank, IMGC and Kotak Mahindra Bank and has over 15 years of experience in investment management in the stock market.