Half Yearly Report

RNS Number : 6306S

India Capital Growth Fund Limited

25 September 2014

 



25 September 2014

INDIA CAPITAL GROWTH FUND LIMITED

INTERIM RESULTS FOR THE PERIOD FROM 1 JANUARY 2014 TO 30 JUNE 2014

CHAIRMAN'S STATEMENT

The first half of calendar year 2014 has been an exciting time for equity investors in India as the stock market's performance reflected greater macro-economic stability and a change of political leadership. After a prolonged period of slower growth, higher inflation, political and economic mismanagement under the Congress led coalition government, India went to the polls in May. The market correctly anticipated change for the better well in advance, but the outcome exceeded even the most positive of predictions, more of which later. Without question these events have caused a renewal of business and consumer confidence domestically and rekindled interest from overseas investors. This optimism has been captured in the performance of the Company's net asset value and share price; the NAV per share grew by 29.4% for the first six months of the year, whilst the share price rose 33.8%. Over the period the Rupee depreciated marginally (0.3%) against Sterling which, given the strength of the latter in recent months, clearly reflects the better light in which India is now perceived.

Economy and Politics

2014 started slowly as corporate investment planning and the Government bureaucracy came to a virtual standstill ahead of the General Election, but this changed overnight as the right of centre BJP, led by Narendra Modi, claimed a sweeping victory. Crucially the party defied pollsters' predictions by winning an absolute majority, meaning that for the first time in India's recent history, a pro-business Government has an absolute majority in Parliament. Whilst, the polling data indicated a workable victory for the BJP, the extent of the mandate delivered signalled the electorate's desire to move away from socialist politics riddled with corruption and towards transparency, accountability, job creation and growth. It was on this platform that the presidential styled campaign of Modi was built. Using his track record of 12 years of service as Chief Minister of the state of Gujarat, where his administration facilitated the delivery of over 10% GDP growth annually, the result has enthused the markets and led to expectations on delivery to soar.

Whilst this is clearly excellent news we should not underestimate the enormity of the challenge that lies before the new Government, nor the inevitability that markets run ahead of themselves. Progress will be made for sure, and India is in a better shape politically and economically than it has been for many years, but it will take time to effect meaningful change and there are countless vested interests that will hinder reform.

Initial signals are positive however. The incoming Government is leaner with overlapping ministries merging and bureaucratic red tape being cut. The Finance Minister's first budget emphasised the Government's commitment to fiscal prudence, to easing the delays to environmental clearance and facilitating infrastructure financing. The on-going delays to infrastructural development are the single biggest challenge to growth stability, and the leadership is right to prioritise this. This has also led to efforts taken to galvanise the bureaucracy, which had hitherto borne the brunt of the previous Government's corruption scandals, and thereby losing positive working relationships with their political masters. The feedback being received from corporate management shows a more proactive, accommodative and energised administration, keen on simplifying permits as well as cutting through red tape. This is an essential platform for big ticket reforms that the Government would like to announce with confidence that delivery would consequently follow.

Further positives can be drawn from the economic tailwind that has resulted both from the outgoing administration's emergency measures to avoid a sovereign downgrade, and the instalment of Dr. Raghuram Rajan as the Reserve Bank of India Governor in September 2013. The currency has stabilised since the excessive volatility of mid-2013, following the US Federal Reserve's announced intention to reduce the extent of their quantitative easing programme. Whilst monetary easing is not forecast before the end of 2014, inflation has started to soften, and we believe that the interest rate cycle may have peaked. Economic indicators are looking up; the index of industrial production (IIP) has been positive for three successive months up to June, car sales grew by 15% year on year in the same month, (a ten month high), and corporate mergers and acquisition activity picked up by 47% over the first half of 2014. Equity market fundraising and asset sales have also picked up, allowing corporates to deleverage their balance sheets and reduce stress on the banking sector's non-performing loans. These are promising signs but only the first steps towards improved economic growth and better corporate earnings.

The recent strong performance of the stock market indicates the extent to which investors' expectations have risen. Amidst all the noise, the portfolio manager has remained faithful to the investment philosophy of buying well managed businesses with strong balance sheets, and secular growth opportunities. Whilst this has caused a period of underperformance to the Company's notional benchmark of 10.1% over the period, this is not surprising. In the early stages of a stock market recovery it is often the poorer quality companies that run hardest, and thus a period of relative underperformance combined with healthy absolute returns should be expected. Your Board remains confident that the Manager's investment process will preserve capital in weak market periods whilst delivering absolute returns over the medium term. This is a good time to be invested in India.

Fred Carr

Chairman

25 September 2014

INVESTMENT MANAGER'S REPORT

Introduction

The first half of 2014 has been very positive for Indian equity markets with a broad based rally across stocks and sectors. While the broader Sensex increased 20.0% during the period, it was the mid-cap stocks that stole the show with the BSE Mid Cap Index rising 39.9%, whilst the fund also participated in this rally rising 29.4% over the period.

Most Emerging Markets also recorded a good performance, driven by global liquidity and easing concerns of a sudden withdrawal of quantitative easing measures by the US Federal Reserve. India however stood out, not just outperforming most markets, but also attracting a disproportionate share of global fund flows.

Economy & Outlook

The driver behind the market rally has been the surprise election results in May 2014. While it was widely anticipated that the BJP led National Democratic Alliance (NDA) would win a majority, the fact the BJP itself was able to do so without the need for coalition support was the real game changer. This is the first time in 30 years that there is a single party with majority forming the Government. The implications are far reaching, as it means that the BJP has a free hand in taking decisions without pandering to the narrow interest of its political partners. Moreover, not only is the BJP known to be pro-industry, but Mr. Narendra Modi, its prime ministerial candidate is known to be decisive, as demonstrated by the strong track record in the state of Gujarat where he had been Chief Minister for three successive terms. The new Government has also been speaking the right language; focus on development, transparency, easing of rules etc. This has not just improved confidence levels within the industry but also consumer sentiment.

While this does provide a lot of hope on the future, the new Government is also inheriting an economy which is on the mend; economic growth rates have bottomed out. The Cabinet Committee of Investments, which was formed in the second half of 2013 to kick start large projects that were stuck due to delays in approvals, has already approved 155 projects worth US$92bn. Inflation too has come off from the peak levels of 11% for most of 2013 to 8% levels. This is largely because of the high base effect but also due to a conscious effort by the Government to rein in inflation by cutting expenditure, restricting increases in agricultural support price increases to 2%-3% (vs. an average of 10% p.a. during the last 10 years) as well limiting wage hikes for rural employment guarantee schemes to nominal increases only.

Finally, Dr. Raghuram Rajan, the Governor of the RBI who was appointed in September 2013, has helped to bring down the current account deficit to 1.7% of GDP in FY14 vs. 4.7% in FY13, through his swift move to curb gold imports (also helped by a decline in oil imports due to weak economic growth). This has helped increase the foreign exchange reserves to US$320bn at present from a low of US$275bn in September 2013. The currency has thus stabilized in the range of INR60-62 to the US$, with low volatility bringing relief to both exporters and importers.

Conclusion

In the first half of 2014 the economy has stabilised with an improving trend in all the key economic indicators; current account deficit, inflation, fiscal deficit and the currency. A recovery in economic growth however still remains elusive, although we believe that this process has started, and with a stable Government and improving levels of confidence, it is surely only a matter of time before investment activity starts. The new Government's short term focus appears to be on ensuring that those infrastructure projects already approved proceed to the investment stage, while the long term focus will be to ensure that the policy framework and bureaucratic process are seamless, clear-cut and completed with minimal Governmental interference. This is essential for building investor confidence and thus sustainable growth. The short term challenge remains to bring down inflation sustainably so that the interest rates can fall. This will provide the long awaited impetus to growth, the next trigger for driving the economy and markets.

Portfolio Construction and Attribution

The portfolio of investments is held by the Company's Mauritian subsidiary, ICG Q Limied (the "portfolio"). During the first half of the year the Manager focused on meeting corporate executives, particularly in sectors linked directly to investment cycles such as infrastructure, industrial and capital goods to gauge the extent of the investment paralysis. Towards the latter half of 2013 it was apparent that the slowdown in capital spending was also impacting consumption; consumer related companies reported volume growth rates falling to single digit growth. Thus the first priority for the new Government was to create a business environment commensurate for a revival of confidence and thus capital expenditure.

As the likely election outcome became more visible, several changes were made to the portfolio to better align it to a recovery in capital expenditure. Positions were taken in Finolex Cables, (India's largest electrical and telecom cable company), Exide Industries (India's largest automotive and industrial battery company), and Gujarat Pipavav Port (an AP Mollar - Maersk Group company). Power Finance Company, government owned and specializing in power finance was also added. These are all companies that are positively leveraged to a recovery in the investment cycle. In addition the Manager initiated a holding in Balkrishna Industries (a niche exporter of off-road tyres to Europe and the United States) and Ajanta Pharmaceuticals (a niche healthcare company with commercial activity in both India and Europe). These are two high quality businesses whose profits are expected to compound over the longer term.

In order to fund these changes the Company's holdings in Telecoms (Idea Cellular) and Energy (Cairn India) were realised and some profits were also booked in Kajaria Ceramics (a manufacturer of ceramic and vitrified tiles), Lupin (pharmaceuticals), and Voltas (which manufactures air-conditioning units). Finally, the Company's position in Sobha Developers (a real estate company and a long term holding in the portfolio), was also trimmed. The portfolio's exposure to the financial services sector was maintained in expectation of an improving business environment and lower interest rates.

The decision to tilt the portfolio's bias towards companies better exposed to a cyclical recovery was well rewarded. The Net Asset Value of the company rose 29.4% over the period in question. This compares to BSE Midcap index which rose 39.9%, and the Manager's Composite Index, which rallied 35.2%, all measured in local currency terms.

It is somewhat disappointing that the increase in the net asset value underperformed the mid cap indices, but it should be noted that the portfolio comfortably outperformed its peer group and the main board stock index, the BSE Sensex, which rose 20% during the period. The main reason for this under-performance versus the mid cap index was the portfolio's lack of direct exposure to pure infrastructure players, industrials and the public sector banks. Although stocks in these specific areas increased multifold over the period, the Manager viewed the embedded risks here as substantially higher than is necessary to meet the investment process. Thus the preference has been to invest in companies which are indirect beneficiaries of an investment led recovery, but with strong balance sheets and proven management quality. Exposures to the consumer and healthcare sectors are also maintained.

Stocks which contributed positively to the increase in the net asset value were Motherson Sumi Systems (4.0% weight) up 78%, Federal Bank (5.4% weight) up 59%, Kajaria Ceramics (3.9% weight) up 70%, Dewan Housing (4.5% weight) up 73% and Voltas (2.5% weight) up 88%. Among the negative contributors was Idea Cellular which fell 22% and Jyothy Laboratories (a 3.5% weight) which fell 9%.

Ocean Dial Asset Management

25 September 2014

INVESTMENT POLICY

The Company'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 Company 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 Company has the flexibility to invest in bonds (including non-investment grade bonds), convertibles and other types of securities. The Company may, for the purposes of hedging and investing, use derivative instruments such as financial futures, options and warrants. The Company 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 Company at the time of the drawdown. It is the Company's declared policy not to hedge the exposure to the Indian Rupee.

PRINCIPAL INVESTMENTS

AS AT 30 JUNE 2014

HOLDING	TYPE		SECTOR				VALUE £000'S		% of PORTFOLIO
Federal Bank	Mid Cap		Financials			2,445			5.42%
Dewan Housing	Small Cap		Financials			2,022			4.49%
Tech Mahindra	Large Cap		IT			1,809			4.01%
Motherson Sumi Systems	Large Cap		Consumer Discretionary			1,807			4.01%
Kajaria Ceramics	Small Cap		Industrials			1,755			3.89%
KPIT Cummins Infosystems	Small Cap		IT			1,620			3.59%
Jyothy Laboratories	Small Cap		Consumer Staples			1,576			3.50%
Eicher Motors	Mid Cap		Industrials			1,553			3.44%
Yes Bank	Mid Cap		Financials			1,428			3.17%
Divi's Laboratories	Mid Cap		Healthcare			1,391			3.09%
Total top 10 equity investments						17,406			38.61%
Other Small Cap	(9 companies)					8,023			17.80%
Other Mid Cap	(12 companies)					12,598			27.95%
Other Large Cap	(5 companies)					4,958			11.00%
Other Unlisted	(1 company)					-			-
Total equity investments						42,985			95.36%
Cash plus other net current assets - Company						(177)			(0.39%)
Cash plus other net current assets - ICG Q Limited (subsidiary)						2,272			5.03%
Total Portfolio						45,080			100.00%
Note: Large Cap comprises companies with a market capitalisation above INR 250 billion (£2.4 billion) Mid Cap comprises companies with a market capitalisation between INR 60 billion and INR 250 billion (£584 million - £2.4 billion) Small Cap comprises companies with a market capitalisation below INR 60 billion (£584 million) The information above relates to the investment portfolio held by ICG Q Limited, the Company's wholly owned subsidiary.

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS TO 30 JUNE 2014

					Unaudited	Unaudited
					Six	Six	Audited
					months to	months to	Year to
					30.06.14	30.06.13	31.12.13
			Revenue £000	Capital £000	Total £000	Total £000	Total £000
Income
Other  income			-	-	-	-	-
Net (losses)/gains on financial assets at fair value through
profit or loss
Market movements			-	10,508	10,508	(3,670)	(3,113)
Foreign exchange movements			-	-	-	-	-
			-	10,508	10,508	(3,670)	(3,113)
Total income			-	10,508	10,508	(3,670)	(3,113)
Expenses
Management fee			(13)	-	(13)	6	4
Other professional fees			(107)	-	(107)	-	(72)
Other expenses			(161)	-	(161)	(175)	(358)
Total expenses			(281)	-	(281)	(169)	(426)
Profit/(loss) for the period/year before taxation			(281)	10,508	10,227	(3,839)	(3,539)
Taxation			-	-	-	-	-
Profit/(loss) for the period/year after taxation			(281)	10,508	10,227	(3,839)	(3,539)
Earnings/(loss) per Ordinary Share (pence)			(0.37)	14.01	13.64	(5.12)	(4.72)

The total column of this statement represents the Company'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 STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 JUNE 2014

			Share Capital £000
				Capital Reserve £000	Revenue Reserve £000		Other Distributable Reserve £000			Total   £000
Balance as at 1 January 2014			750	(30,591)	(8,156)		72,850			34,853
Gain on investments			-	10,508	-		-			10,508
Revenue loss for the period after taxation			-	-	(281)		-			(281)
Balance as at 30 June 2014			750	(20,083)	(8,437)		72,850			45,080

UNAUDITED AND RESTATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 JUNE 2013

			Share Capital  £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve £000	Total   £000
Balance as at 1 January 2013 (as previously stated)			750	(30,281)	(4,955)	72,878	38,392
Restatement due to change in accounting policy			-	2,803	(2,775)	(28)	-
Balance as at 1 January 2013 (as restated)			750	(27,478)	(7,730)	72,850	38,392
Loss on investments			-	(3,670)	-	-	(3,670)
Revenue loss for the period after taxation			-	-	(169)	-	(169)
Balance as at 30 June 2013			750	(31,148)	(7,899)	72,850	34,553

UNAUDITED AND RESTATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2013

			Share Capital  £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve £000	Total   £000
Balance as at 1 January 2013 (as previously stated)			750	(30,281)	(4,955)	72,878	38,392
Restatement due to change in accounting policy			-	2,803	(2,775)	(28)	-
Balance as at 1 January 2013 (as restated)			750	(27,478)	(7,730)	72,850	38,392
Loss on investments			-	(3,113)	-	-	(3,113)
Revenue loss for the period after taxation			-	-	(426)	-	(426)
Balance as at 31 December  2013			750	(30,591)	(8,156)	72,850	34,853

UNAUDITED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2014

		Unaudited		Unaudited		Audited
		30.06.14		30.06.13		31.12.13
		£000		£000		£000
Non-current assets
Financial assets designated at fair value through profit or loss		45,257		34,536		34,973
Current assets
Cash and cash equivalents		58		110		61
Receivables		14		23		15
		72		133		76
Current liabilities
Payables		(249)		(116)		(196)
Net current (liabilities)/assets		(177)		17		(120)
Total assets less current liabilities		45,080		34,553		34,853
Equity
Ordinary share capital		750		750		750
Reserves		44,330		33,803		34,103
Total equity		45,080		34,553		34,853
Number of Ordinary Shares in issue		75,001,463		75,001,463		75,001,463
Net Asset Value per Ordinary Share (pence)		60.11		46.07		46.47

UNAUDITED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS TO 30 JUNE 2014

			Unaudited	Unaudited
			Six	Six	Audited
			months to	months to	Year to
			30.06.14	30.06.13	31.12.13
			£000	£000	£000
Cash flows from operating activities
Management fee			-	-	-
Other cash payments			(228)	(183)	(352)
Net cash outflow from operating activities			(228)	(183)	(352)
Cash flows from investing activities
Purchase of investments			-	-	-
Sale of investments			225	260	380
Transaction charges relating to the purchase and sale of investments			-	-	-
Net cash inflow/(outflow) from investing activities			225	260	380
Net increase/(decrease) in cash and
cash equivalents during the period/year			(3)	77	28
Cash and cash equivalents at the start of the period/year			61	33	33
Exchange losses on cash and cash equivalents			-	-	-
Cash and cash equivalents at the end of the period/year			58	110	61

This announcement was approved by the Board on 25 September 2014. 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 2014 and a copy will be posted on the Company's website www.indiacapitalgrowth.com in accordance with AIM Rule 26.

Disclaimer: Neither the content of the Company's website, nor the content 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:

Apex Fund Services (Guernsey) Limited (Administrator & Secretary)

Stephen Cuddihee          01481 706999

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)

Nathan Brown

Hugh Jonathan                020 7260 1000

 

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