KARACHI: Quiet a large number of subsidiaries of multinational corporations (MNCs) that operate in a variety of fields have their strong presence in the regional markets. Yet, their scope of business, products on offer and size vary.

A handy example is the neighbouring India. Most MNCs that step into India also try finding a firm foothold in Pakistan. Examples can vary from corporates in the chemical, pharmaceutical, foods, automobile, telecom and many more.

Following the announcement of Pakistan’s upgrade to emerging market (EM) from its current place in the frontier market (FM), investors are speculating if it would unleash huge foreign inflows in the local bourses. Regardless of the worries over the persistent current selling of foreign investors at the Pakistan Stock Exchange (PSX), many are hoping for a change in the outlook of foreign fund managers after the Pakistan’s entry into the EM.

Analyst Sadiq Samin at Sherman Securities states in a recent report: “Besides the fact that most of the blue-chips with larger volume may get attraction, we have identified few MNCs, though have limited float in the market may also attract offshore investors’ interest as they are available at huge discount”.

He affirms that post the announcement of Pakistan’s inclusion in EM, investors are comparing the local market with India as the KSE-100 index is currently trading at price-to-earnings (p/e) multiple of 8.7 times, which offers 43pc discount to the Indian benchmark index p/e of 15.2pc.

A sample of companies in various sectors demonstrates the difference in valuations. In pharmaceuticals, for instance GSK Pakistan is on offer at multiple of 32.7 times, sharply lower than its Indian counterpart which trades at p/e of 67.7 times.

Similarly, Abbott Pakistan looks cheap at 23 times against India’s 37.8 times and Sanofi Pakistan, despite the stunning run-up in its stock price over last year has reached 16.3 times; about half of the 30 p/e of same stock in India.

Some other stock value comparison are Bata at 24.1 and 31.6 times (former PSX later BSE); Colgate 25.7 and 46.7 times; Nestle 26.9 and 63.3 times and Pak Suzuki which at the moment trades on the PSX at 60pc discount to the Maruti Suzuki.

Concurrently, there is also a huge difference in the price to book value (P/BV) with Indian companies in most cases reflecting larger premium. It is an interesting study but many market participants argue that the investors’ should consider the underlying reasons for the difference.

Most alluded to the larger size of the Indian market; difference of free-float; production capacity, revenue and profitability of same companies in the two countries.

Besides, the stock markets do not function in isolation, said a fund manager. “Investors put their money in a market after ascertaining all kinds of risks”, says Khurram Schehzd, Chief Commercial Officer at JS Global Securities. He referred to two major risks: the political and security risks, which go to attract or drive away foreign investors. “Consistency in policies; economic growth; strong institutional framework; governance system and business environment,” all add up to create premium in stocks of companies in different markets.

Schehzad observed that though pretty behind in various targets, Pakistan had shown considerable improvement in lowering risks, such as those relating to security and governance.

“There is yet a long way to go for the Pakistan market to gain greater premium which comes with gaining investors’ confidence”. He pointed out that prior to being shown the door in 2008, Pakistan stocks were doing at considerably higher premium of p/e at 12- 13 times in the emerging market”.

Published in Dawn September 13th, 2016