Multinational Corporations(MNC’s) have been immense wealth creators for shareholders over the past couple of decades. Focus on R&D, capital allocation and execution and more importantly a very strong corporate governance has resulted in MNC’s getting very high valuations. So how do the parent companies fare vis-a-vis their Indian subsidaries ?
Lets start with comparing some of the valuations across the years of some major MNC’s with their holding companies and with other emerging market subsidaries of those holding companies
Hindustan Unilever v/s Unilever PLC
The parent company Unilever PLC has a market cap of 122.41 billion GBP translating to around 11,87,377 crores. The company trades at around a 20.42 PE and a 2.63 market cap to sales ratio and the company has a return to equity of around 40 percent. The company has given a 6.1% CAGR return over the past 10 years in GBP and a return of 9.6% in INR. Unilever PLC holds a 47.43 % stake but along with other subsidiaries the total promoter holding is 61.90 % up from 52.01 percent. Unilever group companies hold shares worth of HUL of current value of 3,04,657 crores or around 25.65 % of the entire business up from around 37,376 crores or 10.36 % of the entire business.
Hindustan Unilever has a market cap of 4,92,032 crores. The stock trades at a PE of 67.6 and a market cap to sales ratio of around 11.8 and the company has a return on equity of around 85.7 percent. The company has given around a 20 percent CAGR return over the previous 10 years. Hindustan Unilever’s market cap is around 41.4 % of the parent companies market cap up from 20.8 % in 2010.
Comparing HUL’s valuation metrics with other emerging market subsidaries of Unilever PLC –
Indonesia is the closest emerging market subsidary which is listed, I have also added valuation of Pakistan subsidary for a reference point.
HUL v/s PT Unilever Indonesia TBK v/s Unilever Pakistan Foods Limited
PE ratio – 67.7 / 42.6 / 23.43
Return on Equity – 85.7% / 109.5% / 163.6%
Market Cap to Sales – 11.8 / 6.53 / 5.28
Hindustan Unilever’s valuation metrics are much higher than any of the comparables even when comparing it with other Emerging Markets group companies. However, the company does have a solid track record of top and bottomline growth for a rather long time. I would be skeptical for current valuations holding on for the next decade but that could be a personal bias since I don’t believe the stock to trade at current valuations in the future.
Simulating last decadal returns for the next 10 years would mean that HUL and Unilever PLC will both have a market cap of HUL and Unilever PLC of around 30,00,000 crores by 2030 an incredibly unlikely scenario. One may take this information whatever way you can, but if one has firm convictions it is very likely that Unilever PLC should grow much higher than its 10 year historically average, if HUL can deliver some returns. However base case scenario I believe is going to be that HUL has no room for valuation expansion with some room for valuation de rating, returns of HUL will come directly from its operating top and bottom line expansion.
Maruti Suzuki v/s Suzuki Corporation
The parent company Suzuki Corporation has a market cap of 2.43 trillion JPY translating to around 1,77,550 crores. The company trades at around a 24.79 PE and a 0.73 market cap to sales ratio and the company has a return to equity of around 10.6%. The company has given a 8.8% CAGR return over the past 10 years in JPY and 11.5% CAGR return in INR. Suzuki Corporation holds a 56.37% stake in Maruti Suzuki up from 54.21% 10 years ago. Suzuki Corporation holds shares worth 117264 crores or around 66.24% of the entire business up from around 25397 crores or 47.5% of the entire business.
Maruti Suzuki has a market cap of 2,08,665 crores. The stock trades at a PE of 52.5 and a market cap to sales ratio of around 3.38 and the company has a return on equity of around 6.79%. The company has given around a 17% CAGR return over the previous 10 years. Maruti Suzuki’s market cap is around 120% of the parent companies market cap up from 87.6% in 2010.
I could not find any data for other listed subsidaries except the Pakistan subsdiary – Pakistan Suzuki Motor Company Limited which is a heavy loss making company and I do not believe the comparables to be comparable.
While valuation metrics are a bit haywire due to covid impact and cyclical nature of the business, Suzuki Corporation seems to be a better value buy since the value of the parent company somehow is lower than its Indian subsidiary. Basically what it means is that for 1,77,550 crores you get the Indian subsidiary worth around 1,17,264 crores and for the balance net 60,286 crores you get 33 additional production facilities in 22 countries, the technical know-how and presence in 192 countries. I believe Suzuki Corporation should replicate and surpass how Maruti Suzuki performs. An additional trigger could be a similar execution of utter dominance by Maruti Suzuki in the consumer vehicle in any of the countries where Suzuki Corporation operates in.
Nestle India v/s Nestle S.A
The parent company Nestle S.A. has a market cap of 305.56 billion CHF translating to around 24,95,203 crores. The company trades at around a 22.65 PE and a 3.30 market cap to sales ratio and the company has a return to equity of around 28.7%. The company has given a 6.7% CAGR return over the past 10 years in CHF Terms, and 13.52% in INR terms. Nestle SA directly holds a 34.28 % stake in Nestle India and indirectly holds a 62.76%. Nestle S.A. directly holds shares worth 55,257 crores or around 2.21% of the entire business up from around 11,290 crores or 1.61% of the entire business.
Nestle India has a market cap of 1,61,994 crores. The stock trades at a PE of 77.8, a market cap to sales ratio of around 12.3 and the company has a return on equity of around 70.3%. The company has given around a 16% CAGR return over the last 10 years. Nestle India’s market cap is around 6.49% of the parent companies market cap up from 4.69% in 2010.
Comparing Nestle India valuation metrics with other emerging market subsidaries of Nestle S.A.-
Nestle India v/s Nestle Malaysia v/s Nestle Nigeria PLC
PE ratio – 77.8 / 59.34 / 28.19
Return on Equity – 70.3% / 85.4% / 83%
Market Cap to Sales – 12.3 / 5.64 / 3.74
Nestle S.A. is the largest food company in the world, Nestle India is just a very tiny part of the parent corporation. While both companies have given terrific returns over the last 10 years in INR terms it needs to be seen whether the same performance can be replicated over the next 10 years because of a much higher base. The same common theme of Indian subsidiaries having the highest multiples is a bit concerning, though Nestle India has grown at a solid rate but the price to earning multiples look stretched even by Nestle India standards, any return is more likely to come from top and bottomline expansion rather than a PE expansion.
Lets start with comparing some of the valuations across the years of some major MNC’s with their holding companies and with other emerging market subsidaries of those holding companies
Hindustan Unilever v/s Unilever PLC
The parent company Unilever PLC has a market cap of 122.41 billion GBP translating to around 11,87,377 crores. The company trades at around a 20.42 PE and a 2.63 market cap to sales ratio and the company has a return to equity of around 40 percent. The company has given a 6.1% CAGR return over the past 10 years in GBP and a return of 9.6% in INR. Unilever PLC holds a 47.43 % stake but along with other subsidiaries the total promoter holding is 61.90 % up from 52.01 percent. Unilever group companies hold shares worth of HUL of current value of 3,04,657 crores or around 25.65 % of the entire business up from around 37,376 crores or 10.36 % of the entire business.
Hindustan Unilever has a market cap of 4,92,032 crores. The stock trades at a PE of 67.6 and a market cap to sales ratio of around 11.8 and the company has a return on equity of around 85.7 percent. The company has given around a 20 percent CAGR return over the previous 10 years. Hindustan Unilever’s market cap is around 41.4 % of the parent companies market cap up from 20.8 % in 2010.
Comparing HUL’s valuation metrics with other emerging market subsidaries of Unilever PLC –
Indonesia is the closest emerging market subsidary which is listed, I have also added valuation of Pakistan subsidary for a reference point.
HUL v/s PT Unilever Indonesia TBK v/s Unilever Pakistan Foods Limited
PE ratio – 67.7 / 42.6 / 23.43
Return on Equity – 85.7% / 109.5% / 163.6%
Market Cap to Sales – 11.8 / 6.53 / 5.28
Hindustan Unilever’s valuation metrics are much higher than any of the comparables even when comparing it with other Emerging Markets group companies. However, the company does have a solid track record of top and bottomline growth for a rather long time. I would be skeptical for current valuations holding on for the next decade but that could be a personal bias since I don’t believe the stock to trade at current valuations in the future.
Simulating last decadal returns for the next 10 years would mean that HUL and Unilever PLC will both have a market cap of HUL and Unilever PLC of around 30,00,000 crores by 2030 an incredibly unlikely scenario. One may take this information whatever way you can, but if one has firm convictions it is very likely that Unilever PLC should grow much higher than its 10 year historically average, if HUL can deliver some returns. However base case scenario I believe is going to be that HUL has no room for valuation expansion with some room for valuation de rating, returns of HUL will come directly from its operating top and bottom line expansion.
Maruti Suzuki v/s Suzuki Corporation
The parent company Suzuki Corporation has a market cap of 2.43 trillion JPY translating to around 1,77,550 crores. The company trades at around a 24.79 PE and a 0.73 market cap to sales ratio and the company has a return to equity of around 10.6%. The company has given a 8.8% CAGR return over the past 10 years in JPY and 11.5% CAGR return in INR. Suzuki Corporation holds a 56.37% stake in Maruti Suzuki up from 54.21% 10 years ago. Suzuki Corporation holds shares worth 117264 crores or around 66.24% of the entire business up from around 25397 crores or 47.5% of the entire business.
Maruti Suzuki has a market cap of 2,08,665 crores. The stock trades at a PE of 52.5 and a market cap to sales ratio of around 3.38 and the company has a return on equity of around 6.79%. The company has given around a 17% CAGR return over the previous 10 years. Maruti Suzuki’s market cap is around 120% of the parent companies market cap up from 87.6% in 2010.
I could not find any data for other listed subsidaries except the Pakistan subsdiary – Pakistan Suzuki Motor Company Limited which is a heavy loss making company and I do not believe the comparables to be comparable.
While valuation metrics are a bit haywire due to covid impact and cyclical nature of the business, Suzuki Corporation seems to be a better value buy since the value of the parent company somehow is lower than its Indian subsidiary. Basically what it means is that for 1,77,550 crores you get the Indian subsidiary worth around 1,17,264 crores and for the balance net 60,286 crores you get 33 additional production facilities in 22 countries, the technical know-how and presence in 192 countries. I believe Suzuki Corporation should replicate and surpass how Maruti Suzuki performs. An additional trigger could be a similar execution of utter dominance by Maruti Suzuki in the consumer vehicle in any of the countries where Suzuki Corporation operates in.
Nestle India v/s Nestle S.A
The parent company Nestle S.A. has a market cap of 305.56 billion CHF translating to around 24,95,203 crores. The company trades at around a 22.65 PE and a 3.30 market cap to sales ratio and the company has a return to equity of around 28.7%. The company has given a 6.7% CAGR return over the past 10 years in CHF Terms, and 13.52% in INR terms. Nestle SA directly holds a 34.28 % stake in Nestle India and indirectly holds a 62.76%. Nestle S.A. directly holds shares worth 55,257 crores or around 2.21% of the entire business up from around 11,290 crores or 1.61% of the entire business.
Nestle India has a market cap of 1,61,994 crores. The stock trades at a PE of 77.8, a market cap to sales ratio of around 12.3 and the company has a return on equity of around 70.3%. The company has given around a 16% CAGR return over the last 10 years. Nestle India’s market cap is around 6.49% of the parent companies market cap up from 4.69% in 2010.
Comparing Nestle India valuation metrics with other emerging market subsidaries of Nestle S.A.-
Nestle India v/s Nestle Malaysia v/s Nestle Nigeria PLC
PE ratio – 77.8 / 59.34 / 28.19
Return on Equity – 70.3% / 85.4% / 83%
Market Cap to Sales – 12.3 / 5.64 / 3.74
Nestle S.A. is the largest food company in the world, Nestle India is just a very tiny part of the parent corporation. While both companies have given terrific returns over the last 10 years in INR terms it needs to be seen whether the same performance can be replicated over the next 10 years because of a much higher base. The same common theme of Indian subsidiaries having the highest multiples is a bit concerning, though Nestle India has grown at a solid rate but the price to earning multiples look stretched even by Nestle India standards, any return is more likely to come from top and bottomline expansion rather than a PE expansion.