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MNCs Will Deliver Better Returns

The recent performance of Birla MNC has been pretty good. Mid-cap MNC stocks helped this fund deliver a 15.52% return in the past six months. In an interview with Value Research, fund manager Anil Sarin talks about the prospects of the fund and MNC stocks.

MNCs have been widely respected for their high quality management, etc. Also, high dividend payouts have been a consistent feature with MNC stocks, making them stock market darlings. In the past few years though the shares of big MNCs like Hindustan Lever, ITC and Glaxo-Smithkline Pharma have been severely hammered. Despite that Birla MNC Fund-with a mandate to invest in MNCs-has done some good to its unit holders lately, by shifting focus to mid-caps. Though the universe of MNC stocks has been shrinking fast (buyback, M&A, etc.), Anil Sarin, fund manager, Birla MNC fund, still does not believe that it is getting tougher to structure a meaningful portfolio comprising MNC stocks.

How have MNC shares been performing as compared to the market in the recent past?
The recent performance of MNC stocks has been quite satisfactory. Pharma MNCs have been gaining ground as the date for product patent recognition (January 2005) draws near. The passage of the Power Bill and the increase in spending on road infrastructure, on the other hand, has helped engineering companies like ABB, Siemens, Cummins, Alfa Laval, etc. perform better. FMCG shares too are looking up on expectations of better monsoon this time. Even auto companies are expected to improve their prospects. Looking ahead, better returns can be expected over the medium term from MNC stocks.

What has been the reason for Birla MNC Fund's not-so-successful performance track record?
MNC companies listed in India generally hail from pharma, FMCG and engineering sectors. In the last few years, the performance of these sectors has not been good on account of several reasons. These are: poor monsoon, cut-throat competition among domestic pharma companies (in addition to the handicap of DPCO), and a low spend on capital goods. As far as performance of our fund is concerned, our performance has been in line with that of the Sensex (-3.76 per cent versus -3.66 per cent) for the last one year. For the two-year period ended March 31, 2003, the fund's performance (up 13.37 per cent) has been far better than the Sensex (up 5.25 per cent).

Due to various reasons the universe of MNC stocks is shrinking fast. How do you view this transition in terms of the Birla MNC Fund's performance?
While many MNCs are delisting and /or getting merged, there are new names coming up. Maruti will come out with an IPO soon. Similarly, there are MNCs that were not performing well earlier are doing better now. These are now portfolio candidates. We still do not believe it is getting tougher to structure a meaningful portfolio of MNC companies.

Though Birla MNC has largely invested in large-cap stocks, in the past eight months your focus has shifted to mid-cap stocks like Alfa Laval (India), Burroughs Wellcome, Ingersoll-Rand, etc. Any particular reason for the same?
We are finding that there are a lot of MNC companies that have re-structured their operations, and are doing well now. Valuations are attractive, and the broad market seems to be ignoring them. We see opportunity in investing at this stage. In any case, we do not have a bias for any particular size. Our style is bottom-up, and market capitalisation is a secondary criterion.

Can you give us details about how often did Birla MNC participate in the open offers made by some MNCs like Reckitt Benckiser in March 2002 and Cadbury in January 2002 post- buyback?
We participated in the above-mentioned open offers. We also participated in open offers made by Atlas Copco. etc. We had held those shares for dividend and price appreciation. Open offers came as a pleasant surprise.

What is the reason for higher cash stake? You have always maintained over 10 per cent on an average in cash. In fact, in 2001, average 22 per cent was parked in cash, and currently it is hovering at 11 per cent?
We believe in keeping cash cushion to capitalise on volatile market conditions. Much of this cash has come out of sale of IT shares where we have reduced portfolio weight recently. This money would be deployed in some new stocks that we are evaluating currently.