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Do not copy the MNCs
Wed, 11 Aug Pre-Open

Growth has attracted a huge premium in recent times. Especially with the fastest growth engine in the world, China, showing signs of lethargy. Multinational firms are the best example to cite in such cases. They have come to manifest over enthusiasm in willingness to pay heavy premium. A couple of them buying stakes in Indian companies at expensive valuations are the cases in point.

Growth in developed markets has either stagnated or is showing signs of decline. At such times, getting a pie of emerging markets has become paramount. Especially to MNCs hoping to expose their extensive product lines and established brands to new customers. Some wish to avoid the hassle of conforming to complex regulatory and listing norms. And thus have also bought out listed businesses. Take the example of US drugmaker Abbott's purchase of the domestic formulations business of Piramal Healthcare. The deal came in at a hefty 60% premium! But offered Abbot an extensive presence in one of the fastest growing and very profitable segments of Indian pharma.

The trend nevertheless may not be very safe for retail investors to follow. Benchmarking against the high premiums that foreign investors are willing to pay for growth could be very risky. Legendry investor Jim Rogers has recently aired similar views. He believes that allowing foreign investment in Indian stocks could make the valuations unjustifiable. In an interview to a business daily he said "Indian shares are certainly not cheap and they have gone up a lot, but if they are finally going to make the Indian stock market open and accessible to everybody, that having to go through a bunch of hoops or a bunch of rigmaroles, that is certainly going to attract more and more investors to India. But if India is going to do that, it would have to make me reconsider my views on India"

India's eagerness to attract foreign capital is evident in the government's unwillingness to restrict FIIs. Even if they bring in unnecessary volatility to the stockmarkets. Long term funds in the form of FDIs (foreign direct investment) could certainly make some healthy addition to GDP growth numbers. But the short term high risk investments could be of a disservice. Especially to the retail investors in the country who may be wooed by the expensive valuations.

Coming to the MNCs, retail investors do not have large investible surpluses like them. Nor do the latter have a comparable risk appetite. But what they could share is a long term investment horizon. But the former's willingness to overpay for growth need not be aped by retail investors. For unlike MNCs, retail investors in India have the choice of investing in a variety of businesses offering attractive growth potential. And some are still available at reasonable valuations.

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Feb 20, 2018 (Close)