India gets $3.2bn FDI, investors feel more can be got
India may have got $3.2 billion of precious foreign exchange through Hindustan Unilever’s open offer to buy back its shares at R600 apiece, but the fact that the company managed to get just two-thirds of the shares it initially set out to buy, speaks volumes for the intrinsic consumption power of the economy and the brand HUL has managed to build. A R113 lakh crore economy growing 15% in nominal terms represents a lot of consumer-spend, especially with the middle class proportion of the economy scaling up rapidly—the fact that the mini- and compact-car segment comprises 50% of the passenger vehicles market today as compared to 58% in FY06 is testimony to the speed of this change. Government-owned institutions like LIC may have been encouraged to sell their shares—at that price, they were trading at a forward PE of around 35 compared to historical levels of 25-30—but not all investors are convinced the price is high enough. Some are even looking at another open offer in the future. Till then, with the stock hitting a historical high of R632 in early trades on Friday, those who haven’t cashed out must be feeling pretty smug. And not without reason since, except for some brief periods, the HUL stock has never really disappointed investors. Between March 1991 and now, it has gained a stupendous 5,158% compared with the Sensex’s 1,168% and has been eclipsed by just a few others on dividends, with the average payout, over the last 15 years, upwards of 80%. The return on equity last year was 100%.
From Unilever’s point of view, it always made sense to have a bigger stake in its Indian subsidiary—the profits from markets like India are a lot more promising than in many other parts of the world. India is now Unilever’s third-largest market with the potential to become far bigger given HUL’s stranglehold over key consumer segments and its enviable distribution. As such, the return on the investment, even if leveraged, will be rewarding given money is relatively cheap at a time when global liquidity remains abundant; even if HUL’s dividend yield averages 2.5% in the next few years—it is currently at 3.1%—it would leave Unilever enough of a spread.
The worry here is that since HUL is unlikely to raise funds from the Indian stock market, it might at some stage consider pulling out altogether. So might other cash-rich MNCs; Nestle, for instance, is sitting on cash of close to $10 billion and might want a bigger stake in its Indian outfit, currently at 62.8%. In November last year, GSK Consumer said it was willing to spend R5,552 crore to up its stake in the Indian entity to 75% from the then 43.2% by buying shares at R3,900 apiece; it managed to get to 72.5%. It would be a pity if these blue-chips disappeared from the Indian market; there simply aren’t enough Indian companies to take their place.