Multinational corporations (MNCs) are huge industrial organizations having a wide network of branches and subsidiaries spread over several countries. The two main characteristics of MNCs are their large size and the fact that their worldwide activities are centrally controlled by the parent companies.
i) Strong Moat:
- In most MNCs, the companies possess a specific kind of Moats.
- ‘MOATS’ refers to the competitive advantage which a company enjoys. Competitive Advantage means Outperforming the competitor, getting a good market share, and should be sustainable & long term.
- For Ex. Nestle India which owns the most famous brand ‘Maggi’. In the Nestle Maggi Fiasco back in 2016 where the market share of the company in the Instant Noodles Market came down to ‘Zero’ from the healthier market share of 50%-60%. But due to the strong moat of the company and the brand, Maggi again gained the same market share, once it made a comeback.
- Moat of the companies acts as a barrier for a new player to enter into the business segment.
ii) Strong Global Brand:
- Due to acceptance of the products across different markets all over the world. For Ex. Colgate, Nestle, Unilever, etc.
- Due to this strong global brand, they got an easy entry in the new product categories as well.
- These companies also enjoy the favor of the customers specifically in Urban Areas due to their Strong Global Brand.
iii) Strong Balance Sheet:
- Another reason for the MNCs trading at higher valuations is that most of the MNC Companies are having nil debt and enjoy a low Debt-to-Equity Ratio.
- The Debt-Free balance sheet offers strong Operating Leverage.
- Due to this improved Operating Leverage, there is a rise in Operating Margins.
iv) Higher ROE:
- The Strong Debt Free Balance Sheet of these MNCs leads to Better Operating Leverage, which further results in higher Operating Margins and ultimately High Returns on Equity (ROE).
v) Favor of Institutional Investors:
- The Institutional Investors whether Domestic Institutional Investors (DIIs) or Foreign Institutional Investors (FIIs) on account of good ESG Parameter, strong balance sheet, easy research, and various other reasons give a good response to these stocks in comparison to the local players.
vi) Technological Edge:
- MNC Companies invest more in Technology and Research & Development (R&D).
- If the Pharma Industry of the country is compared, the Indian Pharma Players are investing lower on R&D while MNC Pharma players invest in the double-digit figure of the net sales in the R&D.
- So, MNCs always have an added edge over domestic players in terms of technology and R&D.
The above discusses reasons are the major reasons due to which this MNC’s stocks trade on a higher valuation. The Strong Global Presence and favor of Institutional Investors are the 2 important causes behind some MNC stocks enjoying premium valuation. Do not invest in stocks based on the discussion done above and do follow your due diligence before making any investment decisions.