Foreign Firms in India are Prospering

Foreign Firms in India are Prospering

According to the Economist magazine, despite what some say, foreign firms operating  in India are prospering.  Recent acquisitions by foreigners, such as those by Britain’s Vodafone and Japan’s Dai-ichi Sankyo have done poorly causing some global investors to get discouraged about India.

However, how accurate are these tales?  The stock of FDI in India is now around $220 billion, or 12% of GDP.  This includes everything from research centers in Bangalore to cement plants.

Unlike FDI in China, which has been directed at building factories for export, investment into India is aimed at the domestic market-only 12% of the firms’ sales were foreign.  India has a number of high-profile firms that are listed on Indian stock exchanges, while being controlled by foreign firms, such as Suzuki, Nestle, Unilever and Siemens. These are well-established businesses with deep roots in India and high profitability.  Foreign-controlled firms among the top 100 companies listed in India made a 24% return on equity in the year to March 2011 – better than domestic firms’ returns.  Their market value doubled over the five preceding years.

Some foreign firms had the foresight to convert minority stakes in good Indian firms into controlling ones.  For example Japan’s Suzuki took control of Maruti, India’s biggest car manufacturer by volume.   However, British American Tobacco still owns only 31% of ITC, a conglomerate that has grown so quickly it is now a global player in its own right. Other foreigners have pulled out.  Honda sold its stake in Hero, an Indian motorbike-maker, in 2010 and is now competing directly against it.  The firms that have control of fast-growing subsidiaries have been keen to boost their stakes still further.  Siemens raised its stake in its unit from 55% to 75% in 2011.  Often the valuations of Indian subsidiaries are uncomfortably high.  Nestle India is valued at 50 times its profits – more than double the ratio of its Swiss parent.

Faced with lower stakes than they would like, foreigners have found another way to extract more value from their subsidiaries: charging them “royalty fees”.  On Jan 22nd Hindustan Unilever became the latest firm to do so – announcing that the fee paid to its foreign parent would rise from 1.4% to 3.15% of sales. For India, the trend towards higher royalty payments is a backhanded compliment.  It shows that some foreign-run firms in India make tasty profits, which is why their parent companies guzzle more of them.  As a sign about outsiders’ appetite for India, this may be very important.

What all this means

For those patient and insightful enough to go the distance, India offers substantial profits. A long term view and the ability to take time to understand what makes India tick is key. Nestle, Siemens, Unilever, Amway, IBM and many others have done this.


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