Interim Results

RNS Number : 9129K

India Capital Growth Fund Limited

03 September 2019

 

INDIA CAPITAL GROWTH FUND LIMITED

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2019

3 September 2019 - India Capital Growth Fund ("ICGF" or "the Company"), the London-listed investment company set up to generate long term capital growth from exposure to predominantly mid and small cap listed Indian companies, reports results for the six months ended 30 June 2019.

Highlights for the six months to 30 June 2019

		Unaudited			Audited		Unaudited
		30 June  2019			31 December 2018	% change	30 June  2018
Per Ordinary Share
Net Asset Value (NAV)	97.02p				101.65p	-4.6%	108.09p
Share price discount to diluted NAV	12.4%				14.0%		18.0%
Performance compared to BSE Midcap TR Index			-2.1%		-5.0%		+1.9%
Currency impact
Indian Rupee / Sterling (rupees to the pound)	87.35				88.55	+1.4%	89.93

Company

·    NAV fell 4.6% during the six months, underperforming the BSE Midcap TR Index by 2.1%

·    Investment Manager's fee reduced by 0.25% to 1.25% with effect from 1 July 2019

India

·    Non-banking financial system impacted by the default of lender IL&FS last year

·    Private sector overcapacity and constrained government spending led to anaemic investment growth in the economy

·    Muted lending by public sector banks which make up 65% of the banking sector

·    The inaugural budget from the new BJP Government was poorly received

Outlook

·    Modi's BJP Government was elected on the promise of large infrastructure projects and these should boost the economy

·    Valuations of Indian companies have fallen, especially in the mid and small cap sectors, which have been largely ignored by large institutional investors

·    The Board believes investors now have the opportunity to invest in good quality medium and small cap Indian companies at attractive valuations

Enquiries:
David Harris
Frostrow Capital
[phone]
[e-mail]
William Clutterbuck
MaitlandAMO PR
[phone]
[e-mail]
David Cornell
Ocean Dial Asset Management
[phone]
[e-mail]
Robert Finlay
Shore Capital
[phone]
Nick Robilliard
Apex Fund & Corporate Services
[phone]

About India Capital Growth Fund:

India Capital Growth Fund Limited ("ICGF"), the LSE Main Market listed investment company registered and incorporated in Guernsey, was established to take advantage of long term investment opportunities in companies based in India. ICGF predominantly invests in listed mid and small cap companies, although investments may also be made in large cap Indian companies where the Fund Manager believes long-term capital appreciation will be achieved.

Company website: www.indiacapitalgrowth.com

INDIA CAPITAL GROWTH FUND LIMITED

INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2019

CHAIRMAN'S STATEMENT

Performance

Following a difficult year in 2018, the Indian stock market struggled to move forward in the first half of 2019.  While the large company index showed a positive return, the small and mid-cap index, the BSE MidCap Total Return Index, the notional benchmark for your Company, declined 2.4% in sterling terms.  The Net Asset Value of India Capital Growth Fund fell by 4.6% and the share price by 2.8%. 

The Investment Manager's Report discusses in greater detail the reasons behind this.  Small and mid-cap companies have continued to be hurt by the fallout from the default last year of non-bank lender IL&FS, with liquidity hard to access and the equity market treating harshly companies that fail to meet expectations.

Modi's landslide victory in the May elections was followed by a sharp rally in equities, reflecting the pro-business stance that investors believe Prime Minister Modi and the BJP party will take.  However, the rally was short lived, overtaken by geopolitical concerns about international trade and domestic concerns about economic growth.

Investor relations

Despite the headwinds faced by small and mid-cap Indian equities, there has been plenty of interest in the Company from prospective investors and the media. The Investment Manager has conducted numerous meetings across the UK and presented at three investment conferences. 

In addition, the elections in India created a number of opportunities for the Investment Manager to speak to the press, both via written media and television.  The Board expects that these efforts to increase the visibility of the Company will mean that the Company is firmly in the sights of investors as they begin to understand better the investment opportunities that exist in India.

Board visit to India

In March, the Board visited Ocean Dial's offices in Mumbai, where we had the opportunity to see Gaurav Narain and his team in situ and to receive presentations from the analysts.  The Board felt that this was an excellent opportunity to dig into the Investment Manager's investment process and to understand the commitment that Avendus (Ocean Dial's parent company) has made to the Ocean Dial business.  We met a number of investee companies in Mumbai and Delhi and met market specialists and commentators.  We returned from our visit with a better understanding of some of the hurdles faced by Indian companies, but convinced that there is a huge opportunity for growth as the economy develops and that there are a number of companies in the Company's portfolio well placed to take advantage of this.

Outlook

Along with the apparent slowdown in global growth, Indian companies are facing specific problems of their own, with financial and cement sector companies having experienced negative growth in FY2019.  The Modi Government was elected on the promise of large infrastructure projects and these should give the economy a much needed boost.  It is also expected that the Government will turn its attention to the manufacturing sector, promoting the country's exports.  

As the Investment Manager's Report suggests, valuations have fallen to attractive levels, especially in the mid and small cap sectors, which have been largely ignored by large institutional investors.  Offsetting this is the volatile nature of the politics in India, with concerns about India's relationship with Pakistan remaining in the headlines.  Nonetheless, the Board believes that the recent weakness gives investors a timely opportunity to invest in good quality, medium and small cap companies in India.

Elisabeth Scott

3 September 2019

INVESTMENT MANAGER'S REPORT

In the six months to June 2019, the Net Asset Value (NAV) per share was down 4.6% in Pound Sterling, underperforming the notional benchmark (BSE Mid Cap TR Index) by 2.1%. In Indian Rupee (INR) terms the NAV per share was down 5.9%. The period witnessed a wide divergence in performance between the large cap and mid cap stocks, a trend which has continued since 2018. This is best reflected in the performance of the BSE Sensex TR Index which was up 9.9% while BSE Mid Cap TR Index was down 3.7% (INR). Select large caps have performed well on the back of healthy Foreign Institutional Investors (FII) net equity inflows of US$11bn while the correction has been more evident in the small and mid-cap equities which took the brunt of selling pressure (this could be partly explained by Domestic Institution net outflows of US$1bn, more severe earnings cuts and lower liquidity leading to more pronounced price movements) as investors continued to seek refuge in a limited number of large caps.

The first event to discuss is the BJP's win in the general election that took place in May. Consensus expectations were that the BJP would win fewer seats than it won in 2014 but still have a workable mandate with its coalition partners. As a positive surprise, the BJP not just won an absolute majority, but actually increased its seat share. This is the first time a party has returned to power with a majority since 1971. This brought relief as it ensured policy continuity and a belief that, with key structural reforms having been passed, there is now a stable footing for an economy that is poised to see an acceleration in growth.  

However, since the election results, sentiment has actually deteriorated. One of the main reasons is the slowdown in growth momentum, particularly in the consumption space. GDP growth in the March 2019 quarter slowed down to 5.8%, a significant fall from the 6.6% delivered in the December 2018 quarter.  If one recalls, India's 7% GDP growth was largely being sustained by strong investments in infrastructure by the Government and strong consumption demand. The drag was from weak private sector capex investment due to overcapacity. This too was expected to improve as capacity utilisation levels had touched 78%, with interest rates coming down and a positive election result assuaging concerns over a return to policy uncertainty. However, we are witnessing a sharp slowdown in consumption in urban and rural India. Automobile sales have turned negative across commercial vehicles, passenger vehicles and even two wheelers. Even the FMCG sector growth has almost halved to 4-5%. A sharper fall has happened in rural demand, which was growing at twice the rate of urban demand and has now come down to parity. Our discussion with several companies in the consumer discretionary space all indicate a similar trend. Banks too are consciously going slow on their unsecured loan segment. In this backdrop, it looks like a re-ignition of the corporate sector capex cycle will be delayed further.

There are many other reasons being attributed to the sudden change in sentiments.  One is the elections itself. There are typically three months of campaigning and voting in the run up to an election result, during which the Government machinery slows down as new tender activity stops, the pace of implementation of projects on the ground slows down and even Government payments get delayed.  Moreover, cash in the system gets diverted to election funding. In rural India, the slowdown is being attributed to weak rural incomes caused by two years of weak monsoons compounded by falling food prices. This is also a result of the Government's focus on reigning in inflation of which food is a core component.

Our own belief is that the main trigger behind the slowdown is tight liquidity in the system. The genesis is the default by IL&FS, an AAA rated unlisted Non-Bank Finance Company (which happened in September 2018 and something we wrote about extensively last year). Virtually all mutual funds and banks were lenders to IL&FS. Since its default, most mutual funds have seen redemptions in their debt schemes and have been pulling out money from any business they see as risky. Likewise, even well capitalised banks have turned risk averse and are consciously restricting credit growth. This is having a domino effect with the real pain being felt in the non-banking finance sector (NBFC) which relies on wholesale liabilities (mainly from banks and mutual funds) to fund asset growth. The NBFCs have been the large lenders to the Small and Medium Enterprises (SMEs) as well as to retail borrowers as they are able to provide small ticket loans, filling in gaps left by the banking sector. Moreover, they are also the principal lenders to the real estate sector. With funding drying up for even the well capitalised NBFCs, it is having a direct impact on liquidity across the system. This is seeing itself manifest in various forms:

·    Behaviour patterns are changing. Conserving working capital has become the buzz word.  Most dealers and distributors are focusing on reducing inventories. At the same time many businesses are sacrificing growth if they find their counterparty does not have a strong enough balance sheet.

·    Many promoter families of strong cash rich companies had other business interests, funding for which was obtained by raising debt by pledging shares of the existing business. With refinance proving difficult for these businesses, these families are being forced to top up the pledges (as share prices are falling) and in some cases being forced to sell stakes in their crown jewels or face liquidation by creditors.

·    There are also rising cases of corporate defaults by companies with leveraged balance sheets or cashflow mismatches. This is because the refinancing of working capital is drying up. Consequently, there are sharp downgrades in credit ratings, leading to a further hit on the balance sheet of banks and mutual funds.

The above factors have created nervousness in the business environment. There are concerns of the liquidity crunch leading to defaults in areas such as the real estate sector. In this environment, any negative news on a company is leading to sharp stock prices corrections corresponding with the flight to "mega-cap safety". What has surprised us is the stand taken by the Government. Both the Government and the Central Bank have repeatedly stated that they are on top of the situation, that the problem is restricted to just four or five entities and there are no systemic issues. The Central Bank has been infusing liquidity in the system and claims that there is actually a surplus in liquidity. If this is the case it is clear that it is not reaching the intended target.

It was widely anticipated in the Budget, which was presented in the first week of July, that the Government would try to kick-start the economy by going easy on its fiscal deficit target. Instead it remained on the path of fiscal consolidation, with the fiscal deficit targeted to come down to 3.3%, from 3.4% in the previous year. The Government's viewpoint is that with structural reforms over the past five years in place and further supply-side measures planned, it is more prudent to follow a path of long-term sustainable growth over any short term fix.

The Budget did however open the window for the Government to source up to 10% of its borrowing requirements through sovereign debt issued to the offshore market. This has not been done before and attempts to address concerns of liquidity being sucked up by the Government borrowing at the expense of the private sector. This was a bold move and has already led to 10-year bond yields correcting by almost 40bps. It is anticipated that over the next twelve months, interest rates could see a further drop of about 50-75bps, following the 75bps fall already seen over the last six months.  The Government has set a target of growing India into a US$5 trillion economy by 2025 from US$2.7 trillion on the back of higher investment, savings and exports in the way China's growth was propelled.  Infrastructure expenditure target has been put at US$1.5trn during this period. However, with no concrete measures announced, it remained a disappointment. There were however measures to tackle the current liquidity crisis. This included further capital infusion into public sector banks. Also, the Government will give a 10% first loss guarantee to banks for the next 6 months, on high-rated pooled assets that they purchase from "sound" NBFCs up to a total limit of INRs1trn.

The Government's attempt at raising additional revenues by increasing tax surcharges on super high-income individuals spooked the market. An unintended fallout was that foreign portfolio investors (FPI) registered as trusts and associations would also come under this surcharge. India Capital Growth Fund (ICGF) and its Mauritian subsidiary are corporate entities so are not impacted by this surcharge but nonetheless this covers roughly 40% of FPIs registered in India and implies a jump in their capital gains tax outflow. With net FII outflows of almost US$2bn in July, we did expect the Government to have a rethink and as we write, the Government has indicated that they would begin an exercise of meeting with different industry bodies over the next month to understand the issues they are facing on how to address them. We believe this is the first recognition of the fact that there is a slowdown in the growth momentum.

While markets have come off, it has also been accompanied by downgrades in earnings. For FY19, the Nifty 50 Index earning growth was a modest 9%, compared to a consensus forecast of 25% at the beginning of the previous year. The portfolio itself saw earnings growth diminish largely driven by some of the financials exposure increasing provisioning in the event of NPAs and cement companies, which suffered from low pricing. Both sectors should however see a bounce back in earnings as current short term challenges facing the economy wash through. 

While we do remain optimistic on the long term given the structural reforms already in place, forecasting earnings in the short term is proving to be challenging. This is also because of the global uncertainty led by the US-China trade wars, which has a bearing on some of our portfolio companies, particularly in the IT and auto-ancillary space. We believe sentiment needs to improve and for this we need some trigger factors. A potential resolution of one or two stressed companies in the housing finance space could help as it would provide confidence that there is no systemic issue and there are buyers for these assets. Likewise,  quick resolutions to one or two large assets which have got stuck in legal issues during bankruptcy proceedings could also be a trigger for the banking sector to see a revival in lending.       

In terms of valuations companies are more reasonably priced. After the recent price correction and earnings downgrades, valuations are now below their historical averages. The BSE Mid Cap TR Index is trading at a PE of 16x for FY21 (against its 4yr average of 17x) whilst the large cap Sensex Index is trading at PE of 17x FY21 (against its 4yr average of 15.6x). ICGF trades at PE of 12.5x FY21, both an attractive discount compared to BSE Midcap TR Index and its long term average. Since companies we own have seen sizeable corrections we are finding value within our portfolio. In this environment our aim is to become more concentrated, reducing holdings from 36 stocks currently to about 30 by increasing weights in businesses which have the strongest fundamentals and where we see substantial upside.

Portfolio construction and attribution

We continued to hold most existing investments in the first half with only one stock exited. We did however use the volatility in the market to trim or add exposure in several stocks to take advantage of price movements.

During the period the stock exited was Dewan Housing Finance, a housing finance company, headquartered in Mumbai with branches spread across India. The Company offers housing finance to the lower and middle income groups in semi-urban and rural parts of India.

Many stocks in the portfolio contributed positive returns, including PI Industries (3.9% weight) up 36.0%, Federal Bank (5.7% weight) up 16.3%, NIIT Technologies (4.5% weight) up 17.0%, Kajaria Ceramics (4.0% weight) up 18.0% and PSP Projects (2.2% weight) up 39.9%.

Among the negative contributors were Jyothy Laboratories (3.5% weight) down 25.7%, Yes Bank (2.1% weight) down 39.4%, Jain Irrigation (0.6% weight) down 63.0% and Manpasand Beverages (0.6% weight) down 60.1%.

Outperformance stemmed mainly from stock selection in Materials, HealthCare and Information Technology, holding Cash (7.3% weight) in a falling market and being underweight in Utilities and Energy, while we were negatively impacted due to stock selection in Consumer Staples, Consumer Discretionary, Industrials and Financials.

Ocean Dial Asset Management

3 September 2019

INVESTMENT POLICY

The Company's investment objective is to provide long-term capital appreciation by investing in companies based in India via its wholly-owned subsidiary. The investment policy permits the Company to make indirect 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 2019

Holding	Market cap size	Sector	Value £000	% of Company NAV
Federal Bank	M	Financials	6,205	5.7%
City Union Bank	M	Financials	5,684	5.2%
Tech Mahindra	L	IT	5,162	4.7%
NIIT Technologies	S	IT	4,928	4.5%
Kajaria Ceramics	S	Industrials	4,396	4.0%
PI Industries	M	Materials	4,235	3.9%
Divi's Laboratories	M	Health Care	3,931	3.6%
Jyothy Laboratories	S	Consumer Staples	3,795	3.5%
Berger Paints India	M	Materials	3,562	3.3%
IDFC Bank	M	Financials	3,441	3.2%
Ramkrishna Forgings	S	Materials	3,353	3.1%
Welspun India	S	Consumer Discretionary	3,286	3.0%
Motherson Sumi Systems	M	Consumer Discretionary	3,097	2.8%
Indusind Bank	L	Financials	3,068	2.8%
Aurobindo Pharma	M	Health Care	2,924	2.7%
The Ramco Cements	M	Materials	2,872	2.6%
Exide Industries	M	Consumer Discretionary	2,801	2.6%
Radico Khaitan	S	Consumer Staples	2,789	2.6%
Emami	S	Consumer Staples	2,739	2.5%
Essel Propack	S	Materials	2,680	2.4%
Total top 20 equity investments			74,949	68.7%

Market capitalisation size definitions:
L: Large cap - companies with a market capitalisation above US$7bn
M: Mid cap - companies with a market capitalisation between US$2bn and US$7bn
S: Small cap - companies with a market capitalisation below US$2bn

UNAUDITED STATEMENT OF COMPREHENSIVE INCOME

FOR THE SIX MONTHS TO 30 JUNE 2019

			Unaudited	Unaudited	Audited
			Six months to	Six months to	Year to
			30.06.19	30.06.18	31.12.18
	Revenue £000	Capital £000	Total £000	Total £000	Total £000
Income
Net losses on financial asset at fair value through profit or loss	-	(4,962)	(4,962)	(20,931)	(27,989)
Total income	-	(4,962)	(4,962)	(20,931)	(27,989)
Expenses
Operating expenses	(248)	-	(248)	(243)	(422)
LSE Main Market listing expenses	-	-	-	(155)	(155)
Foreign exchange loss	(1)	-	(1)	-	(1)
Total expenses	(249)	-	(249)	(398)	(578)
Loss for the period/year before taxation	(249)	(4,962)	(5,211)	(21,329)	(28,567)
Taxation	-	-	-	-	-
Loss for the period/year after taxation	(249)	(4,962)	(5,211)	(21,329)	(28,567)
(Loss)/earnings per Ordinary Share (pence)			(4.63)	(18.96)	(25.39)
Fully diluted (loss)/earnings per Ordinary Share (pence)			(4.63)	(18.96)	(25.39)

The total column of this statement represents the Company's condensed 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 and all the items in the above statement derive from continuing operations.

UNAUDITED STATEMENT OF FINANCIAL POSITION

AS AT 30 JUNE 2019

			Unaudited		Unaudited		Audited
			30.06.19		30.06.18		31.12.18
	Notes		£000		£000		£000
Non-current assets
Financial asset designated at fair value through profit or loss	5		109,095		121,615		114,357
Current assets
Cash and cash equivalents			109		45		13
Other receivables and prepayments			175		179		206
			284		224		219
Current liabilities
Payables	7		(226)		(237)		(212)
Net current (liabilities)/assets			58		(13)		7
Total assets less current liabilities			109,153		121,602		114,364
Equity
Ordinary share capital	9		1,125		1,125		1,125
Reserves			108,028		120,477		113,239
Total equity			109,153		121,602		114,364
Number of Ordinary Shares in issue	9		112,502,173		112,502,173		112,502,173
Net Asset Value per Ordinary Share (pence) - Undiluted and diluted			97.02		108.09		101.65

UNAUDITED STATEMENT OF CHANGES IN EQUITY

FOR THE SIX MONTHS TO 30 JUNE 2019

			Share Capital £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve £000	Total   £000
Balance as at 1 January 2019			1,125	28,413	(10,524)	95,350	114,364
Loss on investments			-	(4,962)	-	-	(4,962)
Revenue loss for the period after taxation			-	-	(249)	-	(249)
Balance as at 30 June 2019			1,125	23,451	(10,773)	95,350	109,153

  For the six months to 30 June 2018 (unaudited)

			Share Capital £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve £000	Total   £000
Balance as at 1 January 2018			1,125	56,402	(9,946)	95,350	142,931
Loss on investments			-	(20,931)	-	-	(20,931)
Revenue loss for the period after taxation			-	-	(398)	-	(398)
Balance as at 30 June 2018			1,125	35,471	(10,344)	95,350	121,602

  For the year ended 31 December 2018 (audited)

			Share Capital £000	Capital Reserve £000	Revenue Reserve £000	Other Distributable Reserve  £000	Total   £000
Balance as at 1 January 2018			1,125	56,402	(9,946)	95,350	142,931
Loss on investments			-	(27,989)	-	-	(27,989)
Revenue loss for the period after taxation			-	-	(578)	-	(578)
Balance as at 31 December 2018			1,125	28,413	(10,524)	95,350	114,364

UNAUDITED STATEMENT OF CASH FLOWS

FOR THE SIX MONTHS TO 30 JUNE 2019

			Unaudited		Unaudited		Audited
			30.06.19		30.06.18		31.12.18
			£000		£000		£000
Cash flows from operating activities
Operating loss			(5,211)		(21,329)		(28,567)
Adjustment for:
Net losses on financial asset at fair value through profit or loss			4,962		20,931		27,989
Foreign exchange losses			1		-		1
Operating loss before working capital changes			(248)		(398)		(577)
Working capital changes
Decrease/(increase) in receivables			31		10		(17)
(Decrease)/increase in payables			14		(228)		(253)
Cash flow used in operating activities			(203)		(616)		(847)
Cash flows from investing activities
Partial redemption of investment in ICG Q Limited			300		585		785
Net (decrease)/increase in cash and cash equivalents during the period/year			97		(31)		(62)
Cash and cash equivalents at the start of the period/year			13		76		76
Foreign exchange losses			(1)		-		(1)
Cash and cash equivalents at the end of the period/year			109		45		13

NOTES

1. Accounting Policies

The condensed financial statements have been prepared in accordance with International Accounting Standard ('IAS') 34 'Interim Financial Reporting' as adopted by the European Union and, except as described below, the accounting policies set out in the statutory accounts of the Company for the year ended 31 December 2018.

The condensed financial statements do not include all of the information required for a complete set of International Financial Reporting Standards ("IFRS") financial statements and should be read in conjunction with the consolidated financial statements of the Company for the year ended 31 December 2018, which were prepared under IFRS requirements. 

Certain current standards, amendments and interpretations are not relevant to the Company's operations. Equally, certain interpretations to existing standards which are not yet effective are equally not relevant to the Company's operations. At the date of the authorisation of the Company's financial statements, the following standards and interpretations which were in issue but not yet effective have not been early adopted in those financial statements:-

Standards, interpretations and amendments with no material effect on the financial statements

·    IFRS 15, 'Revenue from Contracts with Customers'. This standard establishes a comprehensive framework for determining whether, how much and when revenue is recognised. It replaced IAS 18, 'Revenue', IAS 11, 'Construction Contracts' and related interpretations.

·    Amendments to IFRS 15 Clarifications to IFRS 15 Revenue from Contracts with Customers

·    Classification and Measurement of Share-based Payment Transactions - Amendments to IFRS2

·    Transfers of Investment Property - Amendments to IAS 40

·    IFRIC Interpretation 22 Foreign Currency Transactions and Advance Consideration

·    Annual Improvements to IFRSs - 2014-2016 Cycle: IFRS 1 First-time Adoption of International Financial Reporting Standards - Deletion of short-term exemptions for first-time adopters

·    Annual Improvements to IFRSs - 2014-2016 Cycle: IAS 28 Investments in Associates and Joint Ventures - Clarification that measuring investees at fair value through profit or loss is an investment - by - investment choice

·    Applying IFRS 9 Financial Instruments with IFRS 4 Insurance Contracts - Amendments to IFRS4

Other standards in issue, but not yet effective including IFRS 16, IFRS 17 and IFRIC 23, are not expected to have a material effect on the financial statements of the Company in future periods and have not been disclosed.

2. Significant accounting judgements, estimates and assumptions

IFRS require management to make judgments, estimates and assumptions that effect the application of policies and the reported amounts of assets and liabilities, income and expenses. The estimates and associated assumptions are based on historical experience and various other factors that are believed to be reasonable under the circumstances, the results of which form the basis of making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. The Company makes estimates and assumptions concerning the future. The resulting accounting estimates will, by definition, seldom equate to the related actual results. The main use of accounting estimates and assumptions occurs in the calculation of the sensitivity analysis. In relation to the valuation of unlisted investment, actual results may differ from the estimates. It is management's judgement that the Net Asset Value (NAV) of ICG Q Limited is an appropriate proxy for fair value as the Company can control the sale of the subsidiary's investments which are all listed on stock exchange in India and therefore mostly regarded as highly liquid.

3. Operating expenses

				Unaudited  Six  months		Unaudited Six  months		Audited Year
				to 30.06.19		to 30.06.18		to 31.12.18
				£000		£000		£000
Administration & secretarial fees				22		26		48
Audit fee - current year				22		7		29
Audit fee - prior year				8		-		-
Broker fee				16		16		26
Directors' fees				44		44		88		80
D&O insurance				3		3		5		6
General expenses				40		36		55		53
Legal and professional fees				23		40		36
Marketing expenses				57		58		110
Registrar fee				3		3		6
Regulatory fees				10		10		19
				248		243		422

4. Earnings per share

Earnings per Ordinary Share is calculated on the loss for the period of £5,211,000 (30 June 2018: £21,329,000) divided by the weighted average number of Ordinary Shares of 112,502,173 (30 June 2018: 112,502,173).

5. Financial assets designated at fair value through profit or loss

			Unaudited		Unaudited		Audited
			Six months to		Six months to		Year to
			30.06.19		30.06.18		31.12.18
			Total		Total		Total
			£000		£000		£000
Fair value at beginning of period/year			114,357		143,131		143,131
Proceeds from partial redemption of investment in ICG Q Limited			(300)		(585)		(785)
Realised gain on partial redemption of investment in ICG Q Limited			190		410		536
Unrealised (loss)/gain on revaluation			(5,152)		(21,341)		(28,525)
Net loss of ICG Q Limited			(4,962)		(20,931)		(27,989)
Fair value at end of period/year			109,095		121,615		114,357

The net realised and unrealised losses totalling £4,962,000 (2018: £20,931,000) on financial assets at fair value through profit and loss arise from the Company's holding in ICG Q Limited. The movement is driven by the following amounts within the financial statements of ICG Q Limited, as set out below:

	Unaudited		Unaudited		Audited
	Six months to		Six months to		Year to
	30.06.19		30.06.18		31.12.18
	Total		Total		Total
	£000		£000		£000
Dividend income	81		199		758
Other income	-		-		15
Unrealised losses on financial assets at fair value through profit or loss	(7,831)		(25,967)		(34,451)
Realised gain on disposal of investments	2,515		5,842		7,659
Investment management fee	(825)		(951)		(1,815)
Operating expenses	(37)		(38)		(71)
Taxes	(2)		(6)		(19)
Transaction costs	(23)		(29)		(65)
Foreign exchange gain/(loss)	1,160		19		-
Net loss of ICG Q Limited	(4,962)		(20,931)		(27,989)

As described in the statutory accounts of the Company for the year ended 31 December 2018, the Company qualifies as an investment entity under IFRS 10. It therefore does not consolidate its investment in ICG Q Limited.

6. Taxation

Guernsey

India Capital Growth Fund Limited is exempt from taxation in Guernsey. The Company is exempt under the Income Tax (Exempt Bodies) (Guernsey) Ordinance 1989 (as amended) and paid the annual exemption fee of £1,200.

For the period ended 30 June 2019, the Company had a tax liability of £nil (2018: £nil).

7. Payables		Unaudited		Unaudited		Audited
		30.06.19		30.06.18		31.12.18
		Total		Total		Total
		£000		£000		£000
Payables in respect of LSE main market listing	-			150		-
Other creditors		226		87		212
		226		237		212

8. Segmental information

The Board has considered the provisions of IFRS 8 in relation to segmental reporting and concluded that the Company's activities form a single segment under the standard. From a geographical perspective, the Company's activities are focused in a single area - Mauritius. The subsidiary, ICG Q Limited, focuses its investment activities in listed securities in India. Additional disclosures have been provided in this Interim Report to disclose the underlying information.

9. Share capital

Ordinary Share Capital of £0.01 each							Number of shares				Share capital
											£000
At 30 June 2019							112,502,173				1,125
At 30 June 2018							112,502,173				1,125
At 31 December 2018							112,502,173				1,125

The Company's capital is represented by Ordinary Shares of par value £0.01. Each share carries one vote and is entitled to dividends when declared. The Company has no restrictions or specific capital requirements on the issue or repurchase of Ordinary Shares.

10. Fair value of financial instruments

The following tables show financial instruments recognised at fair value analysed between those whose fair value is based on:

·    Quoted prices in active markets for identical assets or liabilities (Level 1);

·    Those involving inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly (as prices) or indirectly (derived from prices) (Level 2); and

·    Those with inputs for the asset or liability that are not based on observable market data (unobservable inputs) (Level 3).

The analysis as at 30 June 2019 is as follows:-

			Level 1		Level 2		Level  3		Total
			£000		£000		£000		£000
Unlisted securities			-		109,095		-		109,095
The analysis as at 30 June 2018 was as follows:-
			Level 1		Level 2		Level  3		Total
			£000		£000		£000		£000
Unlisted securities			-		121,615		-		121,615

The analysis as at 31 December 2018 was as follows:-
			Level 1		Level 2		Level  3		Total
			£000		£000		£000		£000
Unlisted securities			-		114,357		-		114,357

The Company's investment in ICG Q Limited, the Company's wholly owned subsidiary is priced based on the subsidiary's net asset value as calculated as at the reporting date.  The Company has the ability to redeem its investment in ICG Q Limited at the net asset value at the measurement date therefore this is categorised as level 2. The classification within the hierarchy does not necessarily correspond to the Investment Manager's perceived risk of the investment, nor the level of the investments held within the subsidiary. All the underlying investments of ICG Q Limited are categorised as level 1. The period-end fair value of those investments, together with cash held in ICG Q Limited, comprise all but an insignificant proportion of the net asset value of the subsidiary.

11. Financial instruments and risk profile

Capital management

The Company is a closed-ended investment company and thus has a fixed capital for investment. It has no legal capital regulatory requirement. Subject to the Guernsey Companies Law, the Board has the power to purchase shares for cancellation thus reducing capital and the Board considers on a regular basis whether it is appropriate to seek shareholder approval for the exercise of such powers. In the period ended 30 June 2019, the Board determined that it was inappropriate to exercise such powers but will seek such shareholder approval at the Annual General Meeting.

The Board also considers from time to time whether it may be appropriate to raise new capital by a further issue of shares. The raising of new capital would, however, be dependent on there being genuine market demand.

The Company holds a single investment in ICG Q Limited, which holds an underlying portfolio of 36 listed equity instruments based in India. Below is an assessment of the various risks the Company may be exposed to via ICG Q Limited.

Market price risk

Market price risk arises mainly from the uncertainty about future prices of the financial instrument held by ICG Q Limited. It represents the potential loss ICG Q Limited may suffer through holding market positions in the face of price movements.

ICG Q Limited's investment portfolio is exposed to market price fluctuations which are monitored by the Investment Manager in pursuance of the investment objectives and policies and in adherence to the investment guidelines and the investment and borrowing powers set out in the Admission Document. ICG Q Limited's investment portfolio is concentrated and, as at 30 June 2019, comprised investment in 36 companies. ICG Q Limited thus has higher exposure to market risk in relation to individual stocks than more broadly spread portfolios.

ICG Q Limited's portfolio consists mainly of mid and small cap listed Indian securities, and thus the effect of market movements is not closely correlated with the principal market index, the BSE Sensex. The BSE Mid Cap Total Return Index provides a better (but not ideal) indicator of the effect of market price risk on the portfolio. Assuming perfect correlation the sensitivity of ICG Q Limited to market price risk can be approximated by applying the percentage of funds invested (30 June 2019: 92.68%; 2018: 93.20%) to any movement in the BSE Mid Cap Total Return Index. At 30 June 2019, with all other variables held constant, this approximation would produce a movement in the net assets of ICG Q Limited of £10,117,000 (2018: £11,333,000) for a 10% (2018: 10%) movement in the index which would impact the Company via a fair value movement of the same magnitude in its holding in ICG Q Limited.

Foreign currency risk

Foreign currency risk arises mainly from the fair value or future cash flows of the financial instruments held by ICG Q Limited will fluctuate because of changes in foreign exchange rates. ICG Q Limited's portfolio comprises predominantly Rupee denominated investments but reporting, and in particular the reported Net Asset Value, is denominated in Sterling. Any appreciation or depreciation in the Rupee would have an impact on the performance of the Company. The underlying currency risk in relation to ICG Q Limited's investments is the Rupee. ICG Q Limited's policy is not to hedge the Rupee exposure.

ICG Q Limited may enter into currency hedging transactions but appropriate mechanisms on acceptable terms are not expected to be readily available.

At 30 June 2019, if the Indian Rupee had strengthened or weakened by 10% (2018: 10%) against Sterling with all other variables held constant, pre-tax profit for the year would have been £10,901,000 (2018: £12,139,000) higher or lower, respectively, mainly as a result of foreign exchange gains or losses on translation of Indian Rupee denominated financial assets designated at fair value through profit or loss in ICG Q Limited and the consequent impact on the fair value of the Company's investment in ICG Q Limited.

Credit risk

Credit risk is the risk that an issuer or counterparty will be unable to meet a commitment that it has entered into with ICG Q Limited. Credit risk in relation to securities transactions awaiting settlement is managed through the rules and procedures of the relevant stock exchanges. In particular settlements for transactions in listed securities are affected by the custodian on a delivery against payment or receipt against payment basis. Transactions in unlisted securities are affected against binding subscription agreements.

The principal credit risks for the Company are in relation to deposits with banks. Kotak Mahindra Bank Limited ("Kotak") acts as the principal banker to the Company. The aggregate exposure to the Kotak at 30 June 2019 was £8,048,000 (2018: £8,063,000).

Kotak acted as custodian of the Group's assets during the period. The securities held by Kotak as custodian are held in trust and are registered in the name of ICG Q Limited. Kotak has a credit rating of AAA.

Interest rate risk

Interest rate risk represents the uncertainty of investment return due to changes in the market rates of interest. The direct effect of movements in interest rates is not material as any surplus cash is predominantly in Indian Rupees, and foreign investors are not permitted to earn interest on Indian Rupee balances.

Liquidity risk

Liquidity risk is primarily the possibility that ICG Q Limited will encounter delays or problems in realising assets or otherwise raising funds to meet financial commitments. As the trading volume on the stock markets of India is lower than that of more developed stock exchanges, the Group may be invested in relatively illiquid securities. ICG Q Limited's focus is to invest predominantly in mid and small cap securities listed on the stock exchanges of India. Minimum liquidity criteria is applied for new purchases, however there remain holdings where there is relatively low market liquidity, which may take time to realise. The Directors do not believe that the market is inactive enough to warrant a discount for liquidity risk on ICG Q Limited's investments.

ICG Q Limited seeks to maintain sufficient cash to meet its working capital requirements. The Directors do not believe it to be appropriate to adjust the fair value of the Company's investment in ICG Q Limited for liquidity risk, as it has the ability to effect a disposal of investments in ICG Q Limited's portfolio at the prevailing market price and the distribution of proceeds back to the Company should it so wish.

All liabilities are current and due on demand.

Taxation risk

Taxation risk arises mainly from the taxation of income and capital gains of ICG Q Limited and the Company increasing as a result of changes in the tax regulations and practice in Guernsey, Mauritius and India. ICG Q Limited is registered with the Securities and Exchange Board of India ("SEBI") as a foreign portfolio investor ("FPI") with a Category II licence, holds a Category 1 Global Business Licence in Mauritius and has obtained a Mauritian Tax Residence Certificate ("TRC") which have been factors in determining its resident status under the India-Mauritius Double Taxation Avoidance Agreement ("DTAA") and General Anti Avoidance Rules ("GAAR") under the Income Tax Act 1961 ("ITA").

However, with effect from April 2017, the DTAA was amended such that the advantages of investing in India via Mauritius were removed and capital gains arising from investments in Indian companies are subject to Indian Capital Gains Tax regulations. Consequently, tax on short term capital gains (for investments held less than 12 months) of 15% and long term capital gains (for investments held for 12 months or longer) of 10% apply to the investment portfolio.

ICG Q Limited seeks to minimise the impact of these changes in the taxation rates applicable to its capital gains by maintaining its investment strategy of investing in a concentrated portfolio for long term capital appreciation. There is no capital gains tax accrual at 30 June 2019 (2018: Nil).

12. Related party transactions

Parties are considered to be related if one party has the ability to control the other party or exercise significant influence over the other party in making financial or operational decisions.  

The Directors are responsible for the determination of the investment policy and have overall responsibility for the Company's activities. Directors' fees are disclosed fully in each Annual Report. The fee payable to the Chairman is £35,000 per annum, to Peter Niven is £25,000 per annum and to John Whittle is £28,000 per annum.

The Investment Manager is entitled to receive a management fee payable jointly by the Company and its subsidiary equivalent to 1.5% (1.25% from 1 July 2019) per annum of Total Assets, calculated and payable monthly in arrears. The Investment Manager earned £826,000 in management fees during the six months ended 30 June 2019 (2018: £951,000) of which £135,000 was outstanding at 30 June 2019 (2018: £150,000).

Under the terms of the Administration Agreement, Apex Fund Services (Guernsey) Limited is entitled to a minimum annual fee of US$41,000 or a flat fee of 5 basis points of the NAV of the Company, whichever is greater. The Administrator is also entitled to reimbursement of all out of pocket expenses. The Administrator earned £22,000 for administration and secretarial services during the six months ended 30 June 2019 (2018: £26,000) of which £3,000 was outstanding at 30 June 2019 (2018: £12,000).

13. Contingent liabilities

The Directors are not aware of any contingent liabilities as at 30 June 2019 and at the date of approving these financial statements.

14. Subsequent events

There are no subsequent events to report.

- END -

This announcement was approved by the Board on 3 September 2019. It does not constitute the Company's unaudited 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 by 10 September 2019 and a copy will be posted on the Company's website www.indiacapitalgrowth.com 

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.

 

END

 

 

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