Half Yearly Report

RNS Number : 1429M

India Capital Growth Fund Limited

13 September 2012

 



13 September 2012

INDIA CAPITAL GROWTH FUND LIMITED

INTERIM RESULTS FOR THE PERIOD FROM 1 JANUARY 2012 TO 30 JUNE 2012

CHAIRMAN'S STATEMENT

I am pleased to report that, despite disappointment over India's economic and political performance over the six month period to 30 June 2012, the Company's performance, as measured by its net asset value, has been creditable both in absolute and relative terms. The net asset value of the Company increased 11.6 per cent to 44.17 pence compared to the BSE Sensex which increased 5.1 per cent and the BSE Mid Cap Index which increased 11.7 per cent, both in Sterling terms. Disappointingly this good performance was not reflected in the share price which fell by 8.9% over the period to stand at a discount of 30.4%. Over the period the Rupee depreciated by 7.3 per cent against Sterling and thus, in Rupee terms, the net asset value was up 19.5 per cent compared to the BSE Sensex which was up 12.8 per cent and the BSE Mid Cap Index which was up 19.8 per cent.

I should mention that we have for some time felt that neither of these benchmarks is ideal because of their disparity with the likely weightings of our portfolio towards large, mid and small cap companies. We are working behind the scenes to produce a bespoke benchmark, to be shown alongside the two existing Index benchmarks, which has weightings of 65 per cent mid cap, 25 per cent large cap and 10 per cent small cap. It will be some months before we make a decision whether or not to add the new benchmark, because we want to be satisfied that it will improve shareholder understanding, rather than being seen as mere "benchmark hopping".

The first six months of 2012 saw an overall improvement in the performance of Indian stock markets although most of this improvement occurred in the first quarter of the year, primarily driven by Foreign Institutional Investor ("FII") inflows which saw USD8.9bn enter India in that quarter. However, due to the resurgence in Eurozone fears, as well as domestic politics, these inflows disappointingly dried up over the second quarter. In April, the Budget for 2012-13 was passed which, despite low expectations, was also disappointing. Apart from a modest plan to reduce the fiscal deficit by containing welfare spending and increasing taxes, there was no sense of any strategic vision or roadmap. It did not go far enough either to alter long term expectations or short term prospects. The largest source of negativity from the Budget came from the proposed General Anti Avoidance Rules ("GAAR") designed to clamp down on capital gains tax avoidance that had been facilitated by bilateral taxation treaties. With certain retrospective capabilities, this proposal left a bitter taste amongst investors, and there was a noticeable fall in both FII inflow and the stock market post the Budget. Consequently the economy grew at a sluggish 5.5 per cent, far below India's historic norm, inflation remains high and there are few signs of a turn in the interest rate cycle.

The six month period also saw the political situation become progressively worse, mirroring the economic news over the period. This started with the ruling coalition partner, the Congress Party, receiving a drubbing in local elections in the areas of Uttar Pradesh, Punjab and Goa. This has compounded an already difficult situation for the Congress Party. By not having a working majority in Parliament, they have had to rely on support from smaller parties, which has increasingly frustrated their ability to enact vital reforms.

Outlook

In spite of several hurdles placed by Indian political paralysis, the domestic story remains strong.

The major political development over the period which has given cause for optimism is the retirement of Pranab Mukherjee from the Finance Ministry and his subsequent elevation to the presidency. This has led to Prime Minister Manmohan Singh taking over his portfolio. Singh, who was the main architect of the 1991 liberalisation reforms, has an understanding of what needs to be done to set India back on track. His initial pronouncements have indicated that the GAAR proposals have been shelved and there has been renewed noise on crucial reforms such as Foreign Direct Investment ("FDI") in aviation and retail.

Whilst nothing solid and significant has materialised yet, at the time of writing, foreign fund flows have recovered. As such foreign institutional investors have invested a net USD11bn into India since the start of the year amidst signs of potential stirrings amongst the political backlog of reforms that have been on the agenda for some time. FDI has also received a boost from two high profile announcements. Firstly, Ikea has decided to invest USD1.9bn to roll out 25 stores in India over the next 15 to 20 years. Secondly, Coca Cola has decided to increase their investment into India to USD5bn over the next eight years in various activities, from distribution to building new beverage bottling plants. These inflows are in line with our sentiment that, regardless of the political situation, there are tremendous opportunities for investing into India.

We are also encouraged by the performance of the Company which is showing signs that the portfolio changes that have been made over the last year are now beginning to bear fruit. Your board is hopeful that if this performance continues then the share price discount to net asset value will narrow.

At the time of writing however a concern is the somewhat disappointing monsoon where rainfall levels are 10.0 per cent below seasonal averages. This could result in further downward pressure on the market as earnings expectations are pared. The decline in the share of agriculture as a component of GDP has lowered the adverse impact of a poor monsoon on overall growth, but the government's ability to respond is somewhat reduced by the country's weak fiscal position as against prior years where similar "droughts" occurred. The monsoon season is not yet over so downward revisions to growth may not be final.

Board change

At the AGM on 14 June 2012 the board said goodbye to Ashok Dayal, who retires with our best wishes. Ashok has served as a director of the Company since its inception in 2005 and we thank him for his consistently sound judgement and wise counsel. At the same time we are delighted to announce the appointment of Vikram Kaushik as his replacement. He brings a breadth of experience ranging across a group of top corporate institutions and we look forward to working with him.

Fred Carr

Chairman  

12 September 2012

INVESTMENT MANAGER'S REPORT

Economic Update

This period can best be characterised by deteriorating fundamentals for the domestic economy and declining growth in global economies. Yet markets rose, not just in India but across emerging economies. This was due to a surge in liquidity, driven by the Long Term Refinancing Operation ("LTRO") rush that came the way of all emerging markets during Q1 2012. India was one of the largest recipients of this inflow, but what surprised us was that this liquidity stayed put, despite many emerging economies witnessing outflows during Q2 2012. This is somewhat baffling given the weakening economic indicators in the domestic economy. The fact that India still maintained one of the highest GDP growth rates among emerging markets and is relatively less dependent on the global environment (exports account for only 17 per cent of GDP), is possibly why foreign flows remained sticky. 

On the economic front, 2011 had brought forward some hard realities. The Indian economy continued to slow and whilst global factors contributed, much of the problems were self-inflicted with the Central Government unable to manage its coalition partners and hampered by a series of corruption scandals driven by years of proliferation. The resultant policy paralysis had crippled investments and delayed the much needed reforms to sustain growth. Moreover, persistent high inflation and a rising fiscal imbalance restricted the Reserve Bank of India ("RBI") in using monetary policy to kick start growth. 

Yet, 2012 had started amidst a lot of hope. The Government, which until now blamed global factors for the deterioration in India's macro environment, came to face the reality of its own shortcomings. Thus there was a lot of promise that the Budget presented in March would address some of the issues. Also, with the state assembly elections in Uttar Pradesh, expectations of an improved showing by the Congress party had built hope that this would strengthen its bargaining power at the Centre. In reality, the Congress party was decimated in Uttar Pradesh and whilst the budget did attempt to rein in the rising fiscal deficit (from 5.9 per cent in FY12 to 5.1 per cent expected in FY13), any announcement on policy measures to kick start investments were absent.

The killer blow came from certain retrograde tax provisions. These were aimed at taxing certain transactions with retrospective effect, effectively questioning the strong and independent legal system of the Supreme Court. A second tax law aimed at curbing tax avoidance gave the Government such sweeping powers, that it would even override existing tax treaties. This also implied that FII might come under the capital gains tax net. These provisions, though still to be implemented, have done a lot to dampen investment sentiment. 

The second quarter of 2012 was marked by a sharp depreciation of the currency. Over a three month period to the end of May, the Rupee depreciated approximately 15 per cent against the USD. India has historically run a current account deficit because it imports 80 per cent of its crude oil requirements, while crude itself accounts for 30 per cent of India's imports. Up until now, this had not posed a concern because of a surplus in the capital account driven by inflows of FDI. However, with risk aversion globally and an adverse investment climate domestically, investors have begun to question the sustainability of these flows. Moreover, with over USD6.5bn of foreign debt obligations due for repayment in the current year, India's Balance of Payments is precariously poised and this is being reflected in the volatility in the currency. The Rupee depreciation has offset benefits that could have arisen due to the falling commodity prices and has ensured inflation remains at elevated levels. Also, with the RBI intervening periodically to reduce volatility, it has squeezed liquidity in the system - both factors limiting the RBI's ability to lower interest rates. 

Though the current account poses a challenge, India remains comfortable on its foreign exchange reserves, and does not own excessive levels of foreign debt, public or private. In addition, the RBI has affected some changes to policy by increasing limits on foreign ownership levels in the debt markets and allowing greater access to corporates looking to raise debt capital overseas. Another avenue for curbing imports is the import of gold which can be as high as 2.5 per cent of GDP. However, should risk aversion increase globally and thereby prompt a further repatriation of capital, the financing of the current account deficit could pose serious short term challenges. Were the reverse to happen, it could have a beneficial impact, as a strengthening currency will bring India's import bill down and the resultant lower cost of crude should reduce inflation and put less pressure on the fiscal deficit. We are beginning to see some signs of this happening. 

While the first six months of the year has been one of the most volatile we have come across, going into the second half of the year, even though most macro indicators are still exhibiting a negative trend, we are turning more optimistic. Incrementally, we are seeing more positive developments. 

Firstly, from a global perspective, the weakening demand environment and its manifestation through lower commodity prices, particularly oil, is a big positive for India. As highlighted earlier, India imports almost 80 per cent of its crude oil requirements. With prices down 17 per cent in Rupee terms from the peak in March 2012, we have seen a significant fall in India's crude import basket. Besides its direct impact on the current account deficit and currency, we see the biggest impact on the government fiscal situation. As 60 per cent of the petroleum basket consumption in India is subsidised by the government, a reduction of about USD10 per barrel in oil could reduce the government subsidy bill by almost USD7.5bn. Also, easing commodity prices will exert less pressure on inflation, giving greater head room to the RBI to ease interest rates to try and instill growth. 

Secondly and more importantly, we are sensing that at the political level, "things" are finally moving. While a lot of this is based on news flows emerging from the various departments of the Government rather than concrete actions, there are two recent developments which we believe have changed the equation:

a) There has been a political realignment, with the principal opponent within the ruling coalition, the Trinamool Congress, being sidelined and in its place a more pragmatic supporter in the form of the Uttar Pradesh based Samajwadi Party. The first test was the nomination for the Presidential election, where despite the opposition of the Trinamool Congress, the ruling coalition went ahead with its nominee. We believe this could signal the beginning of a series of incremental policy announcements on reforms.

b) The second major development has been the departure of the Finance Minister, with the Prime Minster directly taking charge of the portfolio. This is a significant development, especially since the Prime Minister has come under direct flak from Indian industry as well as the investor community for being responsible for the policy paralysis. Interestingly, the first move after taking charge was to state publicly that the adverse tax proposals in the budget would be reconsidered. Other significant policy changes have been mooted and we wait to hear if any of these whispers emerge into anything more concrete. 

While we do admit that even if the political environment improves and some reform measures are implemented, it would take at least another two quarters before it starts to be reflected in any visible improvement in the macro environment. However, we do believe that the ingredients are still in place - a huge consumer market and a large infrastructure deficit. What is urgently required is recovery of industry confidence that the government will start again to address critical issues. Critical to support these renewed efforts is a good monsoon, requiring sufficient rainfall to ensure healthy crop yields to support farmers' incomes and keep a lid on food inflation. 

Having said that, our main worry is the outlook on the annual monsoon rainfall, which is essential to kick start the economy. So far the signs are ominous, with a delay in the onset of the monsoons, and deficit rainfall across most of the country. Though the meteorological department still believes that monsoon should recover, a deficit could upset all calculations. While at 16 per cent of GDP, agriculture is no longer as great a contributor to GDP growth, with almost 60 per cent of the population dependent on agriculture, a weak monsoon could have a cascading impact. It would lower rural income and growth and force the Government to shift expenditure to lessen the burden on the farming community. 

Portfolio construction and performance 

In the 2011 Annual Review we highlighted the reconstruction of the portfolio through a reduction in the concentration levels and an improvement in liquidity. The investment process was also strengthened with the portfolio being built around a combination of high quality stocks and those that offered deep value. The results of these efforts are now visible in much improved portfolio performance. 

The net asset value of the Company was up 19.5 per cent in Rupee terms. Within the portfolio, the average cash position was 13 per cent, though this was deployed and by the end of June, the cash position was down to 6.6 per cent. Incremental investments were largely in stocks in the healthcare and consumer sectors, leaving our largest exposure in the financial, industrial and healthcare sectors. In terms of portfolio positioning, the key differentiator against the benchmark was our significant underweight in materials and consumer discretionary sectors. Positive relative performance was generated from our portfolio positioning in industrials, materials and consumer staples, while a majority of negative relative performance came from our high average holding of cash. 

Portfolio holdings which positively contributed were KPIT Cummins (3.6 per cent weighting), Sobha Developers (3.1 per cent weighting) and Jyothy Labs (4.1 per cent weighting), giving gains of 58 per cent, 80 per cent and 46 per cent respectively for the six months to 30 June 2012. The portfolio also benefited from its exposure in IVRCL, Divi's Laboratories and IndusInd Bank. Besides the cash, the relative negative contribution came from Manappuram Finance, Bilcare and Jain Irrigation. 

Conclusion 

The first half of 2012 has seen a further deterioration in the fundamentals of the Indian economy. Policy inaction and the resultant fall in investment over the last year is now being reflected in declining GDP growth and falling industrial production and credit growth. High and sticky inflation is also limiting monetary policy action. 

The global environment also remains uncertain with further signs of weaker global growth ahead of us. India is feeling this through its volatile currency, declining exports and a rising current account deficit. Going forward though, the fall in commodity prices is a positive as it eases pressure on India's current account as well as tempering inflationary pressures. Any liquidity infusion measures in the Western economy may also result in some liquidity flowing into India, which could greatly help revive the market sentiment. 

A majority of India's current problems are driven by internal factors and thus the solutions also lie within. Policy initiatives and efforts to rebuild confidence can change the investment climate in quick time. We are encouraged that the government has at last acknowledged the issues, with recent political realignments and renewed energy in the corridors of power giving us confidence in the months ahead. 

Ocean Dial Asset Management

12 September 2012 

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 or unlisted 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 per cent 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 30 JUNE 2012

HOLDING	TYPE	SECTOR	VALUE £000	% of PORTFOLIO
Federal Bank  Limited	Mid Cap	Financials	1,406	4.24
Jyothy Laboratories Limited	Mid Cap	Consumer staples	1,357	4.10
Dish TV India Limited	Mid Cap	Consumer discretionary	1,226	3.70
CESC Limited	Mid Cap	Utilities	1,180	3.56
KPIT Cummins Infosystems   Limited	Mid Cap	IT	1,177	3.55
Jain Irrigation Systems Limited	Mid Cap	Industrials	1,083	3.27
Lupin Limited	Large Cap	Healthcare	1,063	3.21
Divi's Laboratories Limited	Large Cap	Financials	1,024	3.09
Indian Bank	Mid Cap	Financials	1,018	3.08
Sobha Developers Limited	Mid Cap	Financials	1,017	3.07
Total top 10 equity investments			11,551	34.87
Other Small Cap	(4 companies)		2,131	6.43
Other Mid Cap	(15 companies)		10,969	33.11
Other Large Cap	(8 companies)		6,279	18.95
Other Unlisted	(1 company)		-	-
Total equity investments			30,930	93.36
Cash plus other net current assets			2,200	6.64
Total Portfolio			33,130	100.00

Note:

Large Cap comprises companies with a market capitalisation above INR 100 billion (£1.4 billion)

Mid Cap comprises companies with a market capitalisation between INR 15 billion and INR 100 billion               (£215 million - £1.4 billion)

Small Cap comprises companies with a market capitalisation below INR 15 billion (£215 million)

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS TO 30 JUNE 2012

					Unaudited	Unaudited
					Six months to	Six months to	Audited Year to
					30.06.12	30.06.11	31.12.11
			Revenue £000	Capital £000	Total £000	Total £000	Total £000
Income
Investment income			151	-	151	152	454
			151	-	151	152	454
Net gains/(losses) on financial assets at fair value through profit
or loss
Market movements			-	6,406	6,406	(8,055)	(16,707)
Foreign exchange movements			-	(2,541)	(2,541)	(1,892)	(7,275)
			-	3,865	3,865	(9,947)	(23,982)
Total income/(expense)			151	3,865	4,016	(9,795)	(23,528)
Expenses
Management fee			(254)	-	(254)	(333)	(613)
Transaction charges for acquisition and disposal of investments		-		(79)	(79)	(97)	(195)
Foreign exchange (losses)/gains			(92)	78	(14)	(88)	(931)
Other expenses			(236)	-	(236)	(258)	(480)
Total expenses			(582)	(1)	(583)	(776)	(2,219)
Profit/(loss) for the period/year before taxation			(431)	3,864	3,433	(10,571)	(25,747)
Taxation			-	-	-	-	-
Profit/(loss) for the period/year after taxation			(431)	3,864	3,433	(10,571)	(25,747)
Earnings/(loss) per Ordinary Share (pence)			(0.57)	5.15	4.58	(14.09)	(34.33)

The total column of this statement represents the Group's statement of comprehensive income, prepared in accordance with IFRS. 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.

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 JUNE 2012

							Other Distributable Reserve £000
			Share Capital £000	Capital 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
Gain/(loss) on investments			-	(2,020)	8,426	-	-	6,406
Revenue loss for the period after taxation (excluding foreign		-		-	-	(431)	-	(431)
exchange losses)
Transaction charges for acquisition and disposal of		-		(30)	(49)	-	-	(79)
investments
Loss on foreign currency			-	(952)	(1,511)	-	-	(2,463)
Balance as at 30 June 2012			750	(27,033)	(8,560)	(4,905)	72,878	33,130

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 JUNE 2011

							Other Distributable Reserve  £000
			Share Capital £000	Capital 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			-	(1,956)	(6,099)	-	-	(8,055)
Revenue loss for the period after taxation (excluding foreign			-	-	-	(525)	-	(525)
exchange losses)
								-
Transaction charges for acquisition and disposal of investments			-	(49)	(48)	-	-	(97)
Loss on foreign currency			-	(240)	(1,654)	-	-	(1,894)
Balance as at 30 June 2011			750	(21,557)	(3,774)	(3,424)	72,878	44,873

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2011

							Other Distributable Reserve £000
			Share Capital £000	Capital 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			-	-	-	(1,575)	-	(1,575)
exchange losses)
Transaction charges for 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

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2012

			Unaudited		Unaudited		Audited
			30.06.12		30.06.11		31.12.11
			£000		£000		£000
Non-current assets
Financial assets designated at fair value through profit or loss			30,930		41,451		21,928
Current assets
Cash and cash equivalents			2,036		3,804		7,865
Receivables			294		927		34
			2,330		4,731		7,899
Current liabilities
Payables			(130)		(1,309)		(130)
Net current assets			2,200		3,422		7,769
Total assets less current liabilities			33,130		44,873		29,697
Equity
Ordinary share capital			750		750		750
Reserves			32,380		44,123		28,947
Total equity			33,130		44,873		29,697
Number of Ordinary Shares in issue			75,001,463		75,001,463		75,001,463
Net Asset Value per Ordinary Share (pence)			44.17		59.83		39.59

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS TO 30 JUNE 2012

				Unaudited		Unaudited
				Six months to		Six months to		Audited Year to
				30.06.12		30.06.11		31.12.11
				£000		£000		£000
Cash flows from operating activities
Investment income				56		27		454
Management fee				(251)		(349)		(646)
Other cash payments				(160)		(288)		(503)
Net cash outflow from operating activities				(355)		(610)		(695)
Cash flows from investing activities
Purchase of investments				(13,931)		(11,281)		(24,627)
Sale of investments				8,628		12,449		30,889
Transaction charges relating to the purchase and sale of investments				(79)		(97)		(195)
Net cash (outflow)/inflow from investing activities				(5,382)		1,071		6,067
Net (decrease)/increase in cash and
cash equivalents during the period/year				(5,737)		461		5,372
Cash and cash equivalents at the start of the period/year				7,865		3,429		3,429
Exchange losses on cash and cash equivalents				(92)		(86)		(936)
Cash and cash equivalents at the end of the period/year				2,036		3,804		7,865

This announcement was approved by the Board on 12 September 2012. It is not the Company's interim accounts, but has been prepared on the same basis as those accounts.

The full Interim Report together with the unaudited accounts for the period is expected to be mailed to shareholders on 30 September 2012 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.

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)

Amul Pandya                    020 7802 8907

Grant Thornton UK LLP (NOMAD)

Philip Secrett

Jen Clarke                        020 7383 5100

Numis Securities Limited (Broker)

Nathan Brown     020 7260 1000

Hugh Jonathan

 

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