Investors should not avoid MNC companies as part of their portfolio largely because they are good dividend payers and also they are defensive play when volatility increases.
The Budget 2020 proposed for the abolition of Dividend Distribution Tax (DDT) in the hands of companies, but it still gets taxed in the hands of recipients or unitholders.
The companies which give out rich dividends to consumers stand to benefit the most. These are mostly MNCs, or multinational corporation, suggest experts.
An MNC is a company that has assets in at least more than one country other than the home country.
The Dividend Distribution Tax which was 15 percent (effectively 20.36%) has been removed by the FM in the Budget 2020-21 and MNCs stand to benefit the most. The reduction in corporate tax last year also helped in boosting the bottomline.
MNCs having subsidiaries in India pay two types of taxes in India: corporate tax and DDT. Last year FM cut the corporate tax rate to 25 percent without exemptions.
Hence, the total tax levied on MNCs is corporate tax at a maximum of 25 percent and DDT at the rate of 20.56 percent (DDT at 15%, plus surcharge and cess) is about 45 percent, suggest experts.
“However, while these foreign shareholders could claim credit for corporate tax paid in India in their home countries, that was not the case with DDT paid by their Indian businesses,” Atish Matlawala, Sr Analyst, SSJ Finance & Securities told Moneycontrol.
“Now, with DDT gone, these investors will be able to claim credit for all tax paid in India in their home jurisdictions. This we believe will make India a lucrative investment destination, and MNC’s will continue to outperform their India peers going ahead,” he said,
The removal of DDT is going to delight the FIIs as those companies that are known for distributing hefty dividends to their particular investors are going to attract investment from global markets.
Stocks hitting 52-week highs:
Most of the MNC companies started hitting fresh 52-week highs in the run-up to the Budget 2020, and post the event. Experts feel that the momentum in some of the stocks is unlikely to go down.
Stocks that have been hitting fresh 52-week highs include Honeywell Automation, Nestle India, as well as Bata India.
There are as many as 10 MNC stocks that outperformed Nifty in 2019 that include names like SKF India, Honeywell Automation, Siemens, Bata India, Whirlpool, and Abbott India.
“Majority of the MNC companies hitting fresh 52 week highs are big beneficiaries of structural changes such as the formalisation of economy, movement of business to large corporates and increasing focus on better corporate governance apart from having cash flow positive businesses and high dividend payouts,” Sameer Kaul, MD & CEO, TrustPlutus told Moneycontrol.
“This premium is likely to continue till Indian corporates adjust to the structural changes in the economy,” he said.
India has always been an attractive market for foreign companies to sell their products because of favourable demographics consisting of young population with aspirations. In times of volatility, defensive stocks like MNC companies are preferred play by investors.
“MNCs are always known for their prudent corporate social responsibility and possess the confidence of the risk-averse investors in order to safeguard them against the inflation and systematic risks so a continuation of investing in those stocks cannot be ruled out,” Kuldeep Tomar, Director, Advisorymandi.com told Moneycontrol.
“Most of the MNCs are running at their 52-week highs and their momentum is not going to deviate in a substantial period of time,” he said.
What should investors do?
Investors should not avoid MNC companies as part of their portfolio largely because they are good dividend payers and also they are defensive play when volatility increases.
A majority of the MNC companies have high cash and bank balances and generate free cash flows. The Nifty MNC index was up by 3.76% (uptil 5 Feb 2020) after Union Budget 2020 when the government scrapped the Dividend Distribution Tax (DDT).
“It would contribute to easing the ways of doing business in India which would make the Indian Economy more lucrative in the global markets. This could further reduce the burden from the MNCs and leave them with higher income to utilize for further expansion and other new projects,” Jashan Arora, Director, Master Capital Services Ltd told Moneycontrol.
“I think this move will be positive for all consumption-linked companies and the overall market to continue the momentum,” he said.
Top picks:
Expert: Atish Matlawala, Sr Analyst, SSJ Finance & Securities.
Colgate, 3M India, Maruti Suzuki:
We like Colgate, 3M India, Maruti and Nestle as we believe their ability to launch newer products according to the taste of Indian consumers makes them far ahead of their peers.
Expert: Jashan Arora, Director, Master Capital Services Ltd.
It is the fastest growing listed pharma company that has outperformed the industry on a consistent basis in women’s health, GI, metabolic, pain, CNS and vaccines. The company has reported a healthy return on capital employed (ROCE) of 37.88% and a return on equity (RoE) of 24.66% FY2019.
The Company has in fact reported good growth in its revenue and profits during the quarter ended Dec 2019.
Nestle India, a subsidiary of Nestle S.A. of Switzerland, is not only a vibrant company that provides consumers in India with products of global standards but also continues to maintain its launch pipeline.
During the Quarter ended 30 Sep 2019, its total sales increased by a commendable rate of 9.5 percent (YoY) and domestic sales grew by 10.5 percent (YoY), driven largely by volume and mix. Maggi, Kitkat, Nestle Munch, Nescafe RTD, Nangrow and Ceregrow delivered strong performances too.
Expert: Kuldeep Tomar, Director, Advisorymandi.com
Nippon Asset Management- India:
After segregating from debt-laden Anil Dhirubhai Ambani Group, the company is managed by the world’s finest insurer Nippon Life Insurance. The company is a leading asset manager with a basket of ETF’s, retirement funds, and equity and gold funds.
With a promoter’s holding of almost 76 percent, the market for the company is highly penetrated and the company’s vision is highly diverted for expansion.
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