Why pay the desi premium?

Anand KalyanaramanBL Research Bureau Updated - February 16, 2014 at 11:03 PM.

Smart investors are taking advantage of the lower valuation of global stocks vis-à-vis Indian ones

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Can you buy a BMW for less than a Maruti? Yes, you can if you’re dabbling in the stock market. The stock of the German luxury automaker is yours at 11 times its annual earnings — about half the 20 times earnings that home-grown Maruti demands.

This is not an isolated case. The valuation of many international stocks is much lower than that of their Indian counterparts today. For instance, foreign cigarette makers Philip Morris and British American Tobacco quote at about 15 times price-to-earnings (PE), less than half of what ITC trades at (33 times).

The stock of food major Kellogg Company is also available for less the half the PE of Britannia Industries.

Similarly, US-based tech giants IBM and Apple are much cheaper on the bourses, based on their valuations, than Indian software biggies TCS, Infosys, Wipro and HCL Technologies. So also pharma majors Pfizer, Merck, Eli Lilly, and Johnson & Johnson compared with Sun Pharma, Lupin and Dr Reddy’s Labs.

Cashing in

It is also interesting that multinational stocks listed in India such as Procter & Gamble, and Hindustan Unilever (HUL) trade at a significant premium to their parent companies listed overseas.

This trend of videshi stocks going at a discount to their desi counterparts hasn’t gone unnoticed.

Seasoned value investors such as Parag Parikh of Parag Parikh Financial Advisory Services have placed some of their bets on foreign stocks. Says Parikh, “Nestle India is trading at 45 times earnings and the Nestle parent company’s depository receipt in the US is trading at 17 times its earnings. So, you are virtually buying the Indian arm free.

“Similarly, we also have 3M in our portfolio. Here, it is trading at 55 times earnings, there at 20 times. So if you understand the business of a company, it is immaterial whether it trades here or there.” Indian fund houses have also been launching many new schemes that seek to capitalise on American, Chinese or European opportunities by investing in stocks listed abroad.

Smart stock-picking at attractive valuations, combined with the benefit from the rupee’s rout, helped older Indian funds, which invest in international stocks, delivered healthy returns in excess of 30 per cent last year.

That said, the valuation gap between Indian stocks and their foreign counterparts may not always be without reason.

Some are cheaper

For instance, analysts warn of growth challenges for some sectors in the developed markets. Innovator pharmaceutical companies in the US may deserve to trade cheaper because they face increased competition from generic players with patents of key drugs set to expire in the next two-three years.

In contrast, stocks of leading mining, realty, steel, oil and gas, and capital goods companies in India trade at a discount to their counterparts in the developed markets. Regulatory troubles seem to be weighing on these stocks. For example, Reliance Industries at 11.5 PE is much cheaper than energy explorers such as Anadarko Petroleum (20 times) and Chesapeake Energy (17 times).

Indian steel giant SAIL, at 11 times, is also cheaper than Korean steel major POSCO (14 times).

Similarly, Cairn India and Hindalco at 5-6 times their trailing earnings are valued much lower than global biggies such as BHP Billiton and Alcoa.

Published on February 16, 2014 17:07