Annual Financial Report

RNS Number : 3826A

India Capital Growth Fund Limited

20 March 2013

 



20 March 2013

INDIA CAPITAL GROWTH FUND LIMITED

ANNUAL RESULTS FOR THE YEAR ENDED 31 DECEMBER 2012

Per Ordinary Share	31 Dec 2012	31 Dec 2011	% change
Net asset value	51.19p	39.59p	+ 29.3%
Market price	41.50p	33.75p	+ 23.0%
Discount	18.93%	14.75%	-
Index
BSE Midcap Index (GBP)	80.36	62.55	+ 28.5%

Key points:

·    Net asset value of the Company increased by 29.3% in sterling terms despite a 7.8% depreciation of the Rupee in the year.

·    Positive returns and outperformance of the notional benchmark (the BSE Midcap Index) are starting to be reflected in the Company's share price.

·    Indian equity markets enjoyed a strong 2012, helped by a surge in global liquidity and a disproportionate share of funds allocated to emerging markets coming India's way.

·    Q4 2012 saw the Indian Government announcing several policy measures which have been instrumental in bringing back confidence levels.  

·    India is entering 2013 on an optimistic note. Inflation is finally easing and the economy is at the beginning of an interest rate easing cycle.

Enquiries:

India Capital Growth Fund Limited

Northern Trust International Fund Administration Services (Guernsey) Limited (Secretary)

Andrew Maiden                01481 745368

Ocean Dial Asset Management Limited (Investment Manager)

Robin Sellers                 

Amul Pandya                    020 7802 8907

Grant Thornton UK LLP (NOMAD)

Philip Secrett

Jen Clarke                        020 7383 5100

Numis Securities Limited (Broker)

Hugh Jonathan

Nathan Brown                  020 7260 1000

CHAIRMAN'S STATEMENT

I am pleased to write that the Indian equity markets enjoyed a strong 2012. The robust performance of equities was primarily caused by two factors: An improvement in the outlook of the global economy, as the markets' fear over a collapse of the Euro eased and a late but necessary revival in the reform agenda of the Indian Government.

Thus the net asset value of the Company increased by 29.3% in Sterling terms; this can be compared to the notional benchmark (the BSE Midcap Index) which rose by 28.5% and the large caps stocks as measured by the Sensex Index which rose 16.6% (both in Sterling terms). The positive returns and the outperformance are encouraging and as such the underlying performance is starting to be reflected in the company share price which appreciated 23.0% over the year.

I mentioned in my statement in the Interim Report 2012 that the management company has been working on a bespoke benchmark that more appropriately reflects the Company's portfolio capitalisation weightings than the BSE Midcap Index. This bespoke benchmark, if formally adopted, would be shown alongside, rather than replace, our current notional benchmark in order to enhance shareholder understanding of our relative performance. In January 2013 we started to disclose publicly this bespoke benchmark for information rather than formal benchmarking purposes and we will continue to do so for the time being before deciding whether to adopt it formally.

Economy and Politics

In 2012 India was a significant beneficiary of the fact that global markets were overflowing with liquidity as a result of the pledge of the Central Banks of developed markets to maintain ultra-loose monetary policy, in conjunction with the European Central Bank's statement that it would do "whatever it takes" to support the Euro. Thus Foreign Institutional Investor (FII) flows into Indian equities totalled USD24.5bn for the year, comfortably in excess of other BRIC and Emerging Market economies' foreign equity flows and despite corporate and investor sentiment in India remaining far from positive throughout the year. This sentiment was reflected in my statement in the Interim Report 2012, written soon after a disappointing April Budget which was more focused on discouraging active foreign investment by retrospectively clamping down on tax issues with its General Anti Avoidance Rule (GAAR) proposal.

By mid-year the threat by Sovereign debt rating agencies to downgrade India to junk status in the international credit markets finally stirred the Government into some affirmative action. The ballooning fiscal deficit driven primarily by fuel subsidies, the weakening currency stemming from a large current account deficit and the apparent inability of the politicians to resolve these issues, caused the markets to question India's realistic investment potential. Most telling perhaps was the Time Magazine cover story which had a picture of the Prime Minister and a caption which simply stated "THE UNDERACHIEVER: India needs a reboot. Is Prime Minister Manmohan Singh up to the job?"

After two and a half years of inaction the Prime Minister shuffled his Cabinet, bringing back to the Finance Ministry Mr P Chidambaram, an earlier incumbent with much needed experience of previous financial crises. This has resulted in a flurry of long overdue reforms. Most notably the Government increased the limit of foreign direct investment into the multi-format retail, insurance and aviation sectors. It has also cut subsidies for fuel, fertilizer and food, as well as initiating plans to restructure the balance sheets of the State Electricity Boards, thereby easing pressure on the banking sector's non-performing loans. These reforms have been instigated well in advance of the General Election of 2014, thereby offsetting the electoral impact of unpopular but necessary economic policy.

Outlook

The outlook for India is more positive than was the case at the time of writing my statements both six months and one year ago. In the face of being placed on negative watch by ratings agencies, the Government has campaigned hard to attract investors back to India. The retrospective tax legislation on the foreign acquisition of Indian assets through an overseas subsidiary has been effectively shelved, as has GAAR, at least until 2016. The commitment to reduce the fiscal deficit has been welcomed, although with some scepticism. It remains to be seen if, ahead of an election in 2014, the Government will be able to deliver on the promises it has made. From a macro perspective, inflation has started to come down and the economy is at the beginning of an interest rate easing cycle. The downward trend in GDP growth, from the highs of around 9%, appears to be bottoming out at the 5% level and consequently corporate earnings, which have been downgraded for 20 months by analysts, may also have troughed.

In India, as always, there is still much to be concerned about. The structural reforms, which are necessary to help the country fulfil its economic potential, have yet to materialise and despite setting up a committee in September to fast track large infrastructure projects, nothing has yet been achieved. Antiquated land acquisition laws and labour laws have yet to be replaced, and a much discussed uniform, countrywide goods and services tax (GST) has yet to be implemented. Nevertheless, despite these concerns, it is clear that the Government is working towards reviving growth.

Fred Carr

Chairman

19 March 2013

INVESTMENT MANAGER'S REPORT

Introduction

After a weak 2011, 2012 proved to be an excellent year for the Indian equity markets. The BSE Midcap Index rallied 38.5% whilst the broader BSE Sensex rose 25.7% in local currency terms. Against this backdrop, the net asset value (NAV) of the fund was up 39.5% in Indian Rupee terms, but only 29.3% in Sterling due to a 7.8% depreciation of the Rupee, which as a matter of policy is not hedged. A detailed discussion on the performance of the portfolio is included later in the report.

The economic fundamentals which had started to weaken in 2011, continued to deteriorate through 2012. This year, however, the surprising highlight was the improving political situation which, after a period of almost 18 months of policy paralysis, saw the Government announce a succession of policy initiatives aimed at attracting foreign investments and addressing the bottlenecks which have been hampering domestic investment. This has helped to boost investor confidence on the basis that these initiatives will arrest the decline in growth and stimulate momentum for higher growth as we look ahead. India's equity markets were also helped by a surge in global liquidity as a disproportionate share of funds allocated to emerging markets came India's way. This is explained by the fact that, despite weakening growth, India still appeared more attractive than other emerging markets, in particular China. Thus India received net foreign institutional investor (FII) inflows of USD24.5bn over the course of the year, the second highest inflow on record for a calendar year. Almost half of this came in the last quarter of 2012. 

Economy and politics

On the economic front the year began with economic weakness. The trend worsened as the year progressed with a below average monsoon and weak industrial output. In the second and third calendar quarters, GDP growth dipped below 5.5%, much below the worst case scenario of 6% predicted by the private sector and significantly below the Government's expectation of over 7% GDP growth for FY13 (ending March 2013) is now projected at 5.0%, the lowest in the last decade. Yet despite weakening growth, inflation remained at elevated levels, largely due to supply side issues. This prevented the Central Bank (RBI) from lowering interest rates further after an initial 50bps cut in April 2012 to 8%.

Throughout this period liquidity in the banking system has remained tight. The reason for this is the expansion of the fiscal deficit, which has forced the government to borrow in excess of its target and thereby further squeezing available funding to the private sector. At the same time, the weak growth globally has hurt India's exports whilst imports fell to a lesser extent, largely because of India's dependence on imported oil and an increase in the demand for imported gold. This is used as an alternative home for savings and is increasingly popular amongst Indian savers owing to the negative real deposit rates that currently exist in the banking system. This has also impacted the current account, periodically forcing the RBI to intervene to support the currency and thereby further tightening liquidity in the system. All in all, 2012 was a year of downgrades with all key macro variables and corporate earnings witnessing declines.

In terms of India's much needed policy reform agenda, the year started under the cloud of corruption-related scandals, which led to a virtual freeze in Government legislation. This hit investment spending particularly in the infrastructure sector, as resource allocation, environment approval and much needed land acquisition reform all ground to a halt. Whilst pressure on the government (and particularly on the Prime Minister) from the capital markets and the financial press began to mount, the Congress Party remained in denial, continuing to blame the country's economic problems on global factors. A vast amount of Parliamentary time was wasted in pandering to the whims of the Congress Party's coalition partners who exploited the situation for their own political benefit. The extent of the disconnect was reflected in the March 2012 Federal Budget which damaged investor confidence further, with attempts to generate additional revenues from new tax laws applicable with retrospective effect.

However, when the international rating agencies started making noises about a downgrade of India's sovereign debt ratings, the government did wake up. The reinstatement of Mr. P Chidambaram as Finance Minister symbolised this change of heart and was a direct attempt to soothe the nerves of the investor community, following the ill-conceived budget proposed by his predecessor, Mr. Mukherjee. Ironically, Mr. Mukherjee was rewarded for his efforts with an elevated promotion to the Indian Presidency. This was followed by a series of reshuffles of cabinet level ministerial portfolios. Of significance were changes of the Environment Minister and the Oil Minister, both of whom were perceived to be too rigid in their policy stance and thus partially responsible for the stalled reform process. A key coalition partner, which had consistently opposed all attempts by the government to reform, was removed.

The period September-December 2012, saw the Government announcing several policy measures, with a new initiative virtually every week. The pace of these developments caught everyone by surprise and has been instrumental in bringing back confidence levels. Some of the key policy initiatives were:

•  Foreign Direct Investment (FDI) limits in the retail, aviation and insurance sectors were raised significantly boosting investor confidence and paving the way for additional capital inflows.

•  The revised tax reforms under the General Anti Avoidance regulation (GAAR) were pushed back by two years.

•  A new investment committee (at Cabinet level), was set up to oversee speedy implementation of projects over a threshold of USD2bn.

•  In order to ease the fiscal deficit, the government announced a calibrated increase in diesel prices and reduction in LPG cylinder subsidies.

•  The Government has also initiated the divestment process, announcing the forthcoming sale of stakes in select public sector companies.

•  To address the worsening current account deficit, the government announced measures to stem the increase in gold imports by raising duties, as well as launching alternative gold investment instruments.

•  The RBI has raised the limits on the extent to which foreign investors can invest in India's debt capital markets, as another means of attracting additional foreign capital.

Besides these broader policy measures, sector specific issues are also being addressed. There are impending new policy announcements in the power sector which aim to address bankrupt state electricity boards, specific directions on coal allocation to power plants, and attempts to change the land acquisition process. All these are aimed at attempting to ensure that bottlenecks are being resolved. Importantly we sense urgency in the Government's efforts to ensure that these issues are addressed and that the results feed through to operations on the ground.

To sum up from a macro perspective, whilst economic performance in 2012 has been poor, the year has ended on a confident note with the belief that the worst is behind us and things will improve going forward. Confidence is building and sentiments are clearly positive.

Outlook for 2013

Going into 2013, the year has started on an optimistic note. The government has instigated measures to address some of the structural issues which plagued the economy in 2012. The fiscal deficit is trending to a more manageable level and threats of a credit downgrade have receded. After being persistently high at 8% - 9% for most of 2012, inflation is finally easing with the central bank expectations of 6.8% by March 2013. The RBI has already softened its hawkish tone and has shifted its rhetoric from an inflation to a growth bias. It is widely anticipated that interest rates will fall between 100-125bps over the course of 2013. This would ease the pressure on the stretched corporate balance sheets, particularly those in the infrastructure and industrial segments. We expect this to help change the mindset of these companies from one of cash preservation to one of investment for growth. This will help drive future earnings expectations and market confidence.

Our main concern, however, stems from the precarious current account balance, driven largely by India's high dependence on oil imports, and more recently aggravated by gold imports as well. This has made India dependent on capital flows to balance its books. We are, however, more confident that capital inflow momentum will be sustained in 2013 because of the recent policy announcements as well as the surplus liquidity in the global markets. Also, we believe, the oil price has a higher probability of declining than rising from its current levels. This is because of the tepid growth in the global environment and the longer term structural effect of large shale gas reserves being put into production in the US. We thus believe that while there remain structural imbalances, 2013 should see a moderation in the current account deficit.

The other factor to watch out for is politics. With central government elections in May 2014 and several large states going for assembly election in 2013, there always remains a risk of politics winning over economics. Therefore several measures, in particular related to subsidy reduction may not eventually be implemented, while other populist measures may be announced. This could send a negative signal to the investment community and undo a lot of the measures announced over the last few months.

To sum up, we believe India is entering 2013 on a more positive note. We do believe that it may take another three to six months for the improved outlook to play out in numbers, both at the macro growth level as well as corporate earnings, but it appears fairly evident that we are now close to the bottom.

Portfolio construction and performance

After a period of restructuring in 2010 and 2011, we started the year with a well balanced portfolio reflecting our core investment ideas. This was reflected in our performance with the NAV increasing by 39.5% during 2012 in local currency terms. This was against a BSE Midcap index which rose 38.5%, and the large cap BSE Sensex which rose 25.7% during the same period. The biggest positive contribution came from stock selection in the industrial, consumer staples and material sectors. We held an average 9% cash balance during the year, which was the main negative contributor to performance. The year-end cash balance stood at 5%.

Within the portfolio, all but two of the investments showed positive absolute returns during the year. Among the top performers was Motherson Sumi (2.9% weighting) and Jyothy Labs (4.4% weighting) which were up 121% and 104% respectively.

Motherson is a leading auto ancillary company with a strong presence in wiring harnesses, rear view mirrors and polymer products. The company caters to virtually all the leading automobile manufactures in Europe and India. Its key strength is the management quality and the relationship it enjoys with its customers. It made two acquisitions in Europe at the behest of its European customers, both of which are now being leveraged and driving growth.

Jyothy is a home grown fast moving consumer goods company (FMCG). The company has recently acquired Henkel's India portfolio and successfully integrated it into the wider business. A new professional management team recruited from some of the leading consumer companies in India is behind this transformation and is driving its future growth. We believe the business is poised to compound ahead of the industry for several years to come.

There were only two companies which showed absolute negative returns in the portfolio. They were Manappuram Finance (2.5% weighting) and Jain Irrigation (2.2% weighting) which declined 24% and 12% respectively.

Manappuram is India's second largest gold loan company, and specialising in financing small ticket size loans with household jewelry as collateral. We believe the business model is strong, given the high return on assets and low levels of risk as the collateral lies with the company. To arrest the sharp growth in the industry, a series of regulatory changes have curbed the growth of the business. However, with all the regulatory uncertainty now behind us, we see the business having a compound annual growth rate (CAGR) of 15-20%, which along with a re-rating will provide superior returns going forward.

Jain Irrigation is India's largest micro-irrigation company. While the opportunity for micro-irrigation in India is massive, the growth so far has been driven by subsidies given by the Government to encourage farmers to adopt the new technology. This has traditionally led to the business having high working capital as there are delays in payment by the government. Over the last two years, Jain Irrigation has been forced to slow down growth in the business as rising interest rates and prolonged delays in settlement of receivables hurt profitability. We believe valuations already reflect this, and the company should be a beneficiary of the lowering rate cycle.     

In conclusion, it is pleasing to be able to report a much improved performance of the investment portfolio relative to the BSE Midcap index, (the portfolio's notional benchmark) and the BSE Sensex index (the main board). The performance has come in tandem with a recovery in absolute terms, albeit with some way still to go before the NAV per share reaches the original subscription price. The improvement is principally a consequence of the completion of a restructuring process that began in January 2010 and this has manifested itself in two ways. Firstly, there is no longer pressure on the NAV through the relentless sale of illiquid stocks in the portfolio, a necessary purging process; but also, the portfolio now fully reflects the views of the investment team and reflects the disciplined bottom-up stock picking process that supports it. This, in combination with some genuine signs of renewed investor interest in India, gives us confidence that there will be additional gains to come in the months ahead.

Ocean Dial Asset Management

March 2013

Investment policy

The Group's investment objective is to provide long-term capital appreciation by investing (directly and indirectly) in companies based in India. The investment policy permits the Group to make investments in a range of Indian equity and equity linked securities and predominantly in listed mid and small cap Indian companies with a smaller proportion in unlisted Indian companies. Investment may also be made in large-cap listed Indian companies and in companies incorporated outside India which have significant operations or markets in India. While the principal focus is on investment in listed equity securities or equity linked securities, the Group has the flexibility to invest in bonds (including non-investment grade bonds), convertibles and other types of securities. The Group may, for the purposes of hedging and investing, use derivative instruments such as financial futures, options and warrants. The Group may, from time to time, use borrowings to provide short-term liquidity and, if the Directors deem it prudent, for longer term purposes. The Directors intend to restrict borrowings on a longer term basis to a maximum amount equal to 25% of the net assets of the Group at the time of the drawdown. It is the Group's declared policy not to hedge the exposure to the Indian Rupee.

PRINCIPAL GROUP INVESTMENTS

AS AT 31 DECEMBER 2012

Holding	Type	Sector	Value £000's	% of Portfolio
The Federal Bank Limited	Mid Cap	Financials	2,276	5.93
Jyothy Laboratories Limited	Small Cap	Consumer staples	1,704	4.44
Yes Bank Limited	Large Cap	Financials	1,636	4.27
Dish TV India Limited	Mid Cap	Consumer discretionary	1,455	3.79
KPIT Cummins Infosystems Limited	Mid Cap	IT	1,416	3.69
Max India Limited	Mid Cap	Industrials	1,344	3.50
Indian Bank	Mid Cap	Financials	1,327	3.46
Kajaria Ceramics Limited	Mid Cap	Consumer discretionary	1,310	3.41
The Jammu & Kashmir Bank Limited	Mid Cap	Financials	1,280	3.33
Larsen & Toubro Limited	Large Cap	Industrials	1,257	3.26
Total top 10 equity investments			15,005	39.08
Other Small Cap	(1 company)		354	0.92
Other Mid Cap	(13 companies)		12,039	31.37
Other Large Cap	(9 companies)		9,089	23.67
Other Unlisted	(1 company)		-	-
Total equity investments			36,487	95.04
Cash less other net current liabilities			1,905	4.96
Total Portfolio			38,392	100.00

Note:

Large Cap comprises companies with a market capitalisation above INR 100 billion (£1.2 billion)

Mid Cap comprises companies with a market capitalisation between INR 15 billion and INR 100 billion (£180 million - £1.2 billion)

Small Cap comprises companies with a market capitalisation below INR 15 billion (£180 million)

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2012

				Year to		Year to
				31.12.12		31.12.11
		Revenue £000	Capital £000	Total £000		Total £000
Income
Investment income		537	-	537		454
		537	-	537		454
Net gains/(losses) on financial assets at fair value through profit or loss
Market movements		-	11,984	11,984		(16,707)
Foreign exchange movements		-	(2,684)	(2,684)		(7,275)
		-	9,300	9,300		(23,982)
Total income/(expense)		537	9,300	9,837		(23,528)
Expenses
Management fee		(531)	-	(531)		(613)
Cost of acquisition and disposal of investments		-	(124)	(124)		(195)
Foreign exchange losses		(41)	-	(41)		(931)
Other expenses		(446)	-	(446)		(480)
Total expenses		(1,018)	(124)	(1,142)		(2,219)
Profit/(Loss) for the year before taxation		(481)	9,176	8,695		(25,747)
Taxation		-	-	-		-
Profit/(Loss) for the year after taxation		(481)	9,176	8,695		(25,747)
Earnings/(Loss) per Ordinary Share - (pence)		(0.64)	12.23	11.59		(34.33)

The total column of this statement represents the Group's statement of comprehensive income, prepared in accordance with IFRS as adopted by the EU and interpretations adopted by the International Accounting Standards Board (IASB). The supplementary revenue and capital columns are both prepared under guidance published by the Association of Investment Companies.

The profit after tax is the "total comprehensive income" as defined by IAS 1. There is no other comprehensive income as defined by IFRS.

All the items in the above statement derive from continuing operations.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2012

						Capital			Other Distributable Reserve £000
			Share Capital £000		Reserve		Revenue Reserve £000
					Realised £000	Unrealised £000				Total   £000
Balance as at 1 January 2012			750		(24,031)	(15,426)	(4,474)		72,878	29,697
(Loss)/gain on investments			-		(2,810)	14,794	-		-	11,984
Revenue loss for the year after taxation (excluding foreign
exchange losses)				-	-	-	(481)	-		(481)
Cost of acquisition and disposal of investments				-	(53)	(71)	-		-	(124)
Loss on foreign currency				-	(2,002)	(682)	-		-	(2,684)
Balance as at 31 December 2012				750	(28,896)	(1,385)	(4,955)		72,878	38,392

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

					Capital		Other Distributable Reserve £000
			Share Capital £000	Reserve		Revenue Reserve £000
				Realised £000	Unrealised £000			Total   £000
Balance as at 1 January 2011			750	(19,312)	4,027	(2,899)	72,878	55,444
Loss on investments			-	(4,011)	(12,696)	-	-	(16,707)
Revenue loss for the year after taxation (excluding
foreign exchange losses)			-	-	-	(1,575)	-	(1,575)
Cost of acquisition and disposal of investments			-	(98)	(97)	-	-	(195)
Loss on foreign currency			-	(610)	(6,660)	-	-	(7,270)
Balance as at 31 December 2011			750	(24,031)	(15,426)	(4,474)	72,878	29,697

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2012

			31.12.12			31.12.11
			£000			£000
Non-current assets Financial assets designated at fair value through profit or loss			36,487			21,928
Current assets
Cash and cash equivalents			2,020			7,865
Receivables			25			34
			2,045			7,899
Current liabilities
Payables			(140)			(130)
Net current assets			1,905			7,769
Total assets less current liabilities			38,392			29,697
Equity
Ordinary share capital			750			750
Reserves			37,642			28,947
Total equity			38,392			29,697
Number of Ordinary Shares in issue			75,001,463			75,001,463
Net Asset Value per Ordinary Share (pence)			51.19			39.59

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2012

			Year to	Year to
			31.12.12	31.12.11
			£000	£000
Cash flows from operating activities
Investment income			537	454
Management fee			(520)	(646)
Other cash payments			(308)	(503)
Net cash outflow from operating activities			(291)	(695)
Cash flows from investing activities
Purchase of investments			(21,220)	(24,627)
Sale of investments			15,961	30,889
Transaction charges relating to the purchase and sale of investments			(124)	(195)
Net cash (outflow)/inflow from investing activities			(5,383)	6,067
Net (decrease)/increase in cash and cash equivalents during the year			(5,674)	5,372
Cash and cash equivalents at the start of the year			7,865	3,429
Exchange losses on cash and cash equivalents			(171)	(936)
Cash and cash equivalents at the end of the year			2,020	7,865

This announcement was approved by the Board on 19 March 2013. It is not the Company's statutory accounts, but has been prepared on the same basis as those accounts. The statutory accounts for the year ended 31 December 2012 have been approved and audited and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The full Annual Report together with the audited accounts for the year is expected to be mailed to shareholders on [28] March 2013 and a copy will be posted on the Company's website www.indiacapitalgrowth.com in accordance with AIM Rule 26.

Disclaimer: Neither the contents of the Company's website, nor the contents of any website accessible from hyperlinks on the Company's website (or any other website), is incorporated into, or forms part of, this announcement.

 

END

 

 

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