Is it valuable to own shares in a subsidiary or directly invest in the parent company. The complexity increases the moment the parent happens to be an MNC. To understand the outcome of this debate, we explored 16 Indian companies that have MNC parentage. At the moment, the Indian subsidiaries are quoting at a much higher valuation in terms of price to earnings than their parents. So, is this an attractive investment opportunity to invest in the parent company listed on foreign stock exchanges? Or, should you instead stick to the Indian listed entity? Investing in the parent company does give your investments access to the earnings of the Indian entity. This does seem to be a smart investment idea, but there is need for more detail than what meets the eye. First, the revenues and earnings growth rates are much higher for the Indian companies compared to the parent companies. This difference is quite substantial to make the difference in the valuations. So, if you are buying a cheaper stock then how fast will it be able to grow depends on the earnings growth as well. Effectively, you pay a higher amount in India to grow quicker than the overseas parent.
Secondly, if you are also gaining access to the fast growing earnings of Indian companies by holding indirectly through the parent company then it is important to see how much they contribute to the total consolidated earnings. We observed that the share of the Indian company in the consolidated earnings of the parent is a small component. It is for this reason that even the fast growing Indian companies do not help that much to the fortunes of the foreign listed parents. What it boils to is that the huge gap in the price to earnings are because of the difference in the pace of growth that varies for each company.
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