Interim Results

RNS Number : 7300Y

India Capital Growth Fund Limited

09 September 2009

 



9 September 2009

INDIA CAPITAL GROWTH FUND LIMITED

PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE PERIOD FROM 1 JANUARY 2009 TO 30 JUNE 2009

CHAIRMAN'S STATEMENT

After the difficult market conditions which prevailed throughout 2008, it is encouraging to report that progress has been made in the first half of 2009. Net Asset Value increased by 13% despite a depreciation of the Rupee by 14% against sterling. For shareholders there was also a significant reduction in the discount to Net Asset Value at which the Company's shares are traded and the Company's share price increased by 52% between 1 January and 30 June 2009.

Although considerable uncertainty remains, there are signs that some stability may be returning to the world's financial markets and that the global economy may be on the verge of a modest recovery. Nevertheless the effect of the events of the last year or so is still taking its toll on business which has had to adjust to reduced levels of demand and credit.  

On the positive side, in India the Reserve Bank of India has recently revised its GDP growth projection for the year to 31 March 2010 to +6.0% with an upward bias. This compares favourably with the IMF's recent projection in its World Economic Outlook (July 2009) that the global economy will contract by 1.4%. The Indian general election in May delivered a firm mandate to the Congress party and there is an expectation of stable government for the next five years. 

Nevertheless there remains concern over the fiscal deficit and the expected weakness of the monsoon. Indian equity markets are particularly sensitive to short term foreign portfolio flows. They have risen rapidly as global liquidity has increased but there continues to be a risk that this could as easily and as rapidly reverse if liquidity is again constrained. Overall however we believe that the India story remains positive.  

The companies in our portfolio have generally weathered the storm well and have emerged with sound balance sheets and business plans broadly intact. Most are focussed primarily on the domestic Indian market and can therefore take advantage of the domestic economy, rather than waiting for the rest of the world to catch up.

The Company has a concentrated portfolio which is built on fundamental analysis rather than the objective of tracking indices, and indeed, as noted in the Investment Manager's Report, in the period under review the performance fell short of the indices on a sterling adjusted basis. We believe the portfolio has the capacity to generate good returns for shareholders over time and we look forward to the future with a degree of confidence.

The absence from the Board of Micky Ingall following his untimely death earlier in the year is still very much felt by us all. We are now in the process of identifying a replacement for him on the Board and we expect to complete this process during the coming months.

On behalf of the Board

Robin Nicholson

Acting Chairman

8 September 2009

SUMMARY INVESTMENT MANAGER'S REPORT

Summary and the market environment 

The anticipated volatility in the markets in the first half of 2009 became reality. The impact of the worldwide financial crisis and consequent recession took its toll, and overlaying this, for most of the period at least, there was the uncertainty arising from the (then) pending general election in India.  

The first three months of the period (January to March) saw markets fall to their lowest level in more than 3 years. Worsening global economic news, uncertainty over the outcome of the Indian general elections and the continuing high interest rates faced by the corporate sector made most market participants, especially FIIs, extremely nervous. During this period the BSE Sensex increased 1%, the BSE Small Cap Index fell 12% and FIIs withdrew around USD 1.6 billion.

The second three months (April to June) saw the return to power of a Congress-led coalition with a comfortable majority and without the need for the support of the communists who had been part of the previous Congress-led government. This political stability and the expectation by FIIs of more free market policies and greater fiscal responsibility by the Congress government, together with an easing of global worries about the economic outlook and reduced domestic interest rates, drove markets sharply upwards. During this period the BSE Sensex rose 49%, the BSE Small Cap Index rose 77% and FIIs invested a net USD 6.3 billion into the Indian market.

Overall, the Net Asset Value of the Company increased by 13.1% in the first six months. An analysis of the performance is set out later in this report.

The Economy

While markets continue to react on sentiment with great volatility, the Indian economy during the first six months of 2009 has performed steadily. GDP for the year to 31 March 2009 rose 6.7% and the government forecast is for GDP to keep growing at 6.0% for the year to 31 March 2010. Despite monetary easing and fiscal stimulus by the government, most analysts expect GDP growth to slow to 6.0% - 6.5% amid the global economic crisis. Growth is expected to reduce further in first half of the fiscal year to March 2010, but recover in the second half.

Key challenges going forward are:

• The monsoon: This has so far been below normal but the Indian Meteorlogical Department as at 28 August 2009 was projecting the shortfall at 25% compared to an earlier forecast shortfall of 54%. Rural consumption will be affected, although not as much as originally feared, but food price inflation, already high, is expected to rise further putting pressure on local demand and consumption of other products and services.

• The high government fiscal deficit. The new budget fell short of expectations and projects a high central government deficit. Government borrowing may thus force interest rates up and make private sector borrowing more difficult and more expensive.

• Longer term - the possible return of inflation. Wholesale prices in India are falling - largely due to oil and commodities that India imports. However consumer price inflation which is driven by domestic factors has remained high and as at 31 July 2009 had risen to 11.89% per annum.

A possible unforeseen silver lining here is the fact that successive Indian governments have liberalised only when government finances are under pressure. This government is no different and has already announced its intention to sell down substantially from a wide range of government controlled companies and relax FDI rules further. This together with a stable level of domestic demand (that often surprises foreigners but is a result of over two decades of freer economic regulations) means that India should overcome the worst effects of the above risks and should continue growing at a pace much higher than nearly all other major global economies. 

Performance

The table below summarises ICGF NAV and share price performance and also shows how rapidly equity market and select macroeconomic indicators changed over the six months to 30 June 2009.

Six months to June 2009			31.12.2008	30.06.2009	Change
ICGF
NAV undiluted			42.9	48.5	+13.1%
Share Price			29.0	44.0	+51.7%
Equity Indices
BSE Sensex			9,647.3	14,493.8	+50.2%
BSE Mid Cap Index			3,235.1	5,076.3	+56.9%
BSE Small Cap Index			3,683.1	5,740.0	+55.8%
Exchange Rates
INR - GBP			70.02	80.08	-14.4%
INR - USD			48.45	47.87	-1.2%
FII Net Investment over prior six months			- USD 6.8 bn	+ USD 4.7 bn
Inflation (Wholesale Price Index)			5.86%	-1.55%
Inflation (Consumer Price Index)			9.70%	9.29%
Interest Rates (RBI Repo Rate)			6.50%	4.75%	-175 bps

During the period NAV grew by 13%, against 50% for the BSE Sensex and 56% for the BSE Small Cap Index. The weakness of the Rupee against sterling was a major factor in the NAV performance:  Sterling rose by some 14.5% in the period, directly impacting the value of all our Rupee investments, as it is the Company's declared policy not to hedge the sterling/rupee exchange risk. Even so, on a sterling adjusted basis the portfolio underperformed the BSE Small Cap Index.

Four holdings contributed particularly to this underperformance:

• Bilcare which was our largest holding at the year end, whose share price failed to move in the strong market recovery. Liquidity in the stock is very low, and FIIs hold little of the stock. An overhang of FCCBs issued in 2007 is being addressed and we are confident that the company's medium term prospects remain sound. It remains a core element of the portfolio.

• IOL, the share price of which fell 30% during the period. The company's business plan remains on track and necessary additional funding is now in place.

• Logix, the share price of which fell 15% during the period. Logix is exposed to the US automotive market which remains under severe pressure, although the company has continued to perform satisfactorily. Even so, the company is diversifying its business model and has USD 11 million in cash equivalent to Rs 43 per share, against a share price as at 30 June 2009 of Rs 67. 

• Marwadi, our principal unlisted investment, where we have taken a cautious view and not changed the valuation of the holding in Rupee terms.

The portfolio remains concentrated, in contrast to the BSE Small Cap Index which contains over 475 stocks, and inevitably this will result in performance diverging from the wider market. Nevertheless we believe that within each investee company there sits considerable value that will be recognized over time and will generate superior returns to investors. The portfolio remains focused on smaller companies, but in a diversified range of sectors.

Summary of Activity 1 January 2009 to 30 June 2009 

Activity during the 6 months to 30 June 2009 was based on four main results of our analysis and thoughts:

i. We believe that the major companies in ICGF's portfolio continue to retain their sustainable competitive advantages, market positions and demand for their products and services. A summary of the market position for the top six companies representing more than 50% of the portfolio will be set out in the full Interim Report.

ii. We remain convinced that a concentrated portfolio has better longer term advantages than a widely diversified portfolio. The top 10 holdings as at 30 June 2009 made up 69% of the portfolio. We have thus remained patiently invested in these companies during the period despite highly volatile and now substantially lower share prices of these companies as compared to cost.

iii. Exits: We have or will exit from some of the micro cap holdings. A lesson from the market volatility of the last 18 months is that companies that are extremely small have found the present economic challenges too great a strain on their market positions and balance sheets. We thus exited from two such companies and are reducing our stakes in others. We also used the market upturn to exit from a large cap and another company where we saw no further upside from our positions.

iv. We continue to see a regular flow of interesting public and private companies but have not found any sufficiently attractive to invest in. We have remained patient and kept sufficient dry powder for the right opportunities when they emerge.

Throughout the period we have retained close and regular contact with all investee companies, monitoring progress and assisting where possible in a number of ways. Assistance has included help in shareholder communications, introduction to potential new investors, providing an external perspective on management information systems and internal audit processes, and views on capital raising and M&A activity.

Comments on the individual results of the top 10 companies will be set out in the full Interim Report.

Conclusion

We have not made any radical changes to the composition of the portfolio. As set out in the Admission Document we have invested in companies that we believe are well managed, with sound business plans and good prospects for long term growth. We have not deviated from this policy. The portfolio remains concentrated in number of stocks but broadly spread geographically and by industry, with a predominant focus on companies exposed to the domestic Indian growth story.   

India Investment Partners Limited 

8 September 2009

PRINCIPAL GROUP INVESTMENTS

AS AT 30 JUNE 2009

HOLDING	TYPE	SECTOR	VALUE £000'S	% of PORTFOLIO
S Kumars Nationwide Limited	Small Cap	Textiles	5,265	14.48
Bilcare Limited	Small Cap	Pharmaceutical services & packaging	3,057	8.41
ICSA India Limited	Small Cap	Process controls	2,893	7.96
Varun Shipping Limited	Small Cap	Shipping	2,784	7.66
Marwadi Shares and Finance Limited	Unlisted	Financial services	2,619	7.20
Prime Focus Limited	Small Cap	Media	2,253	6.20
Great Offshore Limited	Mid Cap	Offshore oil & gas services	1,851	5.09
Grabal Alok Impex Limited	Small Cap	Textiles	1,674	4.60
Bank of Rajasthan Limited	Small Cap	Financial services	1,391	3.82
Hindustan Dorr-Oliver Limited	Small Cap	Engineering	1,303	3.58
Total top 10 investments			25,090	69.00
Other Small (10 companies)			8,319	22.87
Other Unlisted (1 company)			-	-
Total investments			33,409	91.87
Cash and other net current assets			2,955	8.13
Total Portfolio			36,364	100.00

UNAUDITED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS TO 30 JUNE 2009

			Unaudited	Unaudited	Audited
			Six months to	Six months to	Year to
			30.06.09	30.06.08	31.12.08
	Revenue £000	Capital £000	Total £000	Total £000	Total £000
Income
Fixed deposit interest	1	-	1	105	150
Bank interest income	-	-	-	11	16
Investment income	94	-	94	178	553
	95	-	95	294	719
Net gains/(losses) on financial assets at fair value through profit or loss
Market movements	-	14,800	14,800	(67,637)	(103,617)
Foreign exchange movements	-	(9,881)	(9,881)	(4,204)	13,289
	-	4,919	4,919	(71,841)	(90,328)
Total income	95	4,919	5,014	(71,547)	(89,609)
Expenses
Management fee	(228)	-	(228)	(548)	(849)
Cost of acquisition and disposal of investments	-	(6)	(6)	(111)	(160)
Foreign exchange (losses)/gains	(332)	(2)	(334)	(64)	187
Other expenses	(233)	-	(233)	(230)	(441)
Total expenses	(793)	(8)	(801)	(953)	(1,263)
Profit/(loss) for the period/year before taxation	(698)	4,911	4,213	(72,500)	(90,872)
Taxation	-	-	-	(7)	(17)
Profit/(loss) for the period/year after taxation	(698)	(4,911)	4,213	(72,507)	(90,889)
Earnings/(loss) per Ordinary Share -  Basic (pence)			5.62	(96.68)	(121.19)
Earnings/(loss) per Ordinary Share - Diluted (pence)			5.62	(96.68)	(121.19)

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.

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 2009

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2009	750	2,689	(43,073)	(1,092)	72,877	32,151
Gain/(loss) on investments	-	(7,870)	22,670	-	-	14,800
Revenue loss for the period after taxation (excluding foreign exchange losses)	-	-	-	(698)	-	(698)
Cost of acquisition and disposal of investments	-	(4)	(2)	-	-	(6)
(Loss)/gain on foreign currency	-	1,190	(11,073)	-	-	(9,883)
Balance as at 30 June 2009	750	(3,995)	(31,478)	(1,790)	72,877	36,364

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 JUNE 2008

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2008	750	(2,729)	52,713	(571)	72,877	123,040
(Loss)/gain on investments	-	8,955	(76,592)	-	-	(67,637)
Revenue loss for the period after taxation (excluding foreign exchange losses)	-	-	-	(616)	-	(616)
Cost of acquisition and disposal of investments	-	(58)	(53)	-	-	(111)
Loss on foreign currency	-	(2,047)	(2,096)	-	-	(4,143)
Balance as at 30 June 2008	750	4,121	(26,028)	(1,187)	72,877	50,533

AUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2008

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2008	750	(2,729)	52,713	(571)	72,877	123,040
(Loss)/gain on investments	-	6,813	(110,430)	-	-	(103,617)
Revenue loss for the year after taxation (excluding foreign exchange losses)	-	-	-	(521)	-	(521)
Cost of acquisition and disposal of investments	-	(70)	(90)	-	-	(160)
Gain/(loss) on foreign currency	-	(1,325)	14,734	-	-	13,409
Balance as at 31 December 2008	750	2,689	(43,073)	(1,092)	72,877	32,151

UNAUDITED CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2009

	Unaudited		Unaudited		Audited
	30.06.09		30.06.08		31.12.08
	£000		£000		£000
Non-current assets
Financial assets designated at fair value through profit or loss	33,409		45,285		28,915
Current assets
Cash and cash equivalents	3,048		5,637		3,431
Receivables	25		13		8
	3,073		5,650		3,439
Current liabilities
Payables	(118)		(402)		(203)
Net current assets	2,955		5,248		3,236
Total assets less current liabilities	36,364		50,533		32,151
Equity
Ordinary share capital	750		750		750
Reserves	35,614		49,783		31,401
Total equity	36,364		50,533		32,151
Number of Ordinary Shares in issue	75,000,063		75,000,000		75,000,000
Undiluted Net Asset Value per Ordinary Share (pence)	48.49		67.38		42.87
Fully diluted Net Asset Value per Ordinary Share (pence)	48.49		67.38		42.87

UNAUDITED CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS TO 30 JUNE 2009

	Unaudited		Unaudited		Audited
	Six months to		Six months to		Year to
	30.06.09		30.06.08		31.12.08
	£000		£000		£000
Cash flows from operating activities
Investment income	94		179		554
Fixed deposit interest	1		105		150
Bank interest	-		13		19
Management fee	(224)		(653)		(975)
Performance fee	-		(7,654)		(7,654)
Other cash payments	(313)		(304)		(422)
Net cash outflow from operating activities	(442)		(8,314)		(8,328)
Cash flows from investing activities
Purchase of investments	(710)		(30,772)		(40,249)
Sale of investments	1,107		35,015		42,157
Transaction charges relating to the purchase and sale of investments	(6)		(111)		(160)
Net cash inflow from investing activities	391		4,132		1,748
Net decrease in cash and cash equivalents during the period/year	(51)		(4,182)		(6,580)
Cash and cash equivalents at the start of the period/year	3,431		9,944		9,944
Exchange (losses)/gains on cash and cash equivalents	(332)		(125)		67
Cash and cash equivalents at the end of the period/year	3,048		5,637		3,431

This preliminary announcement was approved by the Board on 8 September 2009. 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 11 September 2009 and a copy will be posted on the Company's

website www.indiacapitalgrowth.com in accordance with AIM Rule 26.

Enquiries:

India Capital Growth Fund Limited

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

Andrew Maiden                  01481 745368

India Investment Partners Limited (Manager)

James Winterbotham        020 7802 8902

Arbuthnot Securities Limited (NOMAD)

Alastair Moreton                 020 7012 2000

 

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