The Indian markets have lately been hit by a series of corporate governance crises. This has seen the stock prices of the affected companies crashing. One pocket of stocks that has shown resilience amidst these circumstances is MNC stocks. Thanks to their solid corporate-governance standards, they have not just saved investor wealth but have also given a decent appreciation over the long term.
We speak to Ajay Garg of Aditya Birla Mutual Fund regarding the ongoing corporate governance situation. Mr Garg has been managing Aditya Birla SL MNC Fund since 2009, which has assets of over Rs 3,400 crore.
Indian markets have recently been hit by corporate governance crises. In your view, what has caused all these problems to come to the fore all of a sudden?
Over the past year, Indian markets have faced issues such as the economic slowdown and the IL&FS crisis, which resulted in tightened liquidity, especially for NBFCs. This in turn negatively impacted companies with high leverage and brought the corporate governance issues to the fore.
How grim is the situation? How deep does the corporate governance crisis go in the Indian corporate sector?
It would not be fair to extrapolate the corporate governance issues of a few companies to the Indian corporate sector. We should remember that this government has undertaken some bold measures like demonetisation, GST, recent reduction of corporate tax rate, etc. While the reforms will take some time to show their effect, the companies that are focused, solution-oriented, and professionally backed will bounce back much faster.
The stocks of companies with a clean image, such as many MNCs, currently trade at eye-watering valuations. Many other front-line companies are available at single-digit P/Es. When do you see this valuation differential narrowing?
Most of the high-quality companies, especially MNCs, have been consistently investing in the country, driven by the under-penetration in various categories and potential growth. As per capita income goes north of $2000, they will be better positioned to reap the rewards due to their portfolio of products and global experience. Especially now when corporate governance is in focus, MNCs, which typically have good governance standards, will continue to command a premium over others.
Theoretically, high valuations are inversely proportional to returns. How do you see the valuations of MNC stocks with respect to this, especially when their growth rates are often dismal?
Most MNCs are continuing to gain market share. Their growth rates are far superior to their counterparts in the industry. Hence, their earnings can catch up with the valuations.
How do you select stocks for your MNC fund? When do you exit a stock?
Our investment universe is composed of companies wherein a significant stake is held by a global major present across geographies, right from emerging to developed markets. Within this basket, we select stocks based on merit, evaluating factors such as brand, investment in R&D, product basket, experience to launch new products at the right time, etc. We are patient long-term investors.
What are your top corporate governance filters?
We mainly look at the management track record, transparency, and equitable treatment to non-promoter shareholders.
Banking and finance have historically proved to be a minefield globally. How can one avoid pitfalls while picking stocks from this sector?
Banking and finance is a leveraged play on the economy. The slowing economy calls for a cautious approach rather than focusing purely on leverage-fuelled growth. One should remember that profits come first but NPAs follow.
Today Indian IT companies are truly global in nature, yet your portfolio has no exposure to IT bellwethers.
One of our main criteria for including a company in our MNC investment universe is that a significant stake in the company has to be held by a global major. In that context, Indian IT companies do not fit our criteria for MNCs.
Ask Value Research 
New episodes every Friday 
New Process Alert 
Seems like you've uploaded a wrong QR code. Please upload the QR code downloaded from MF Central platform.
