Net Asset Value(s)

RNS Number : 7750V

India Capital Growth Fund Limited

08 November 2010

 



India Capital Growth Fund Limited

08 November 2010



India Capital Growth Fund Limited (the "Company" or "ICGF")

31 October 2010 NAV Statement

Net Asset Values

The Company announces its net asset values per share as at 31 October 2010:

Net asset value per share - undiluted 77.22 pence

Net asset value per share - fully diluted 77.22 pence

Portfolio update

The net asset value (NAV) rose 0.3% in October to 77.22 pence per share. In local currency terms the NAV was down 0.1% for the month compared to the 2.7% rise in the BSE Midcap index. The broader index (BSE Sensex) was down 0.2%. The Rupee appreciated against sterling by 0.3% continuing its strength since September.

The portfolio ended the month with 36 stocks and an invested position of 92.6% compared to 92.0% in the previous month. The weighting of cash (7.5%) and unlisted investments (7.8%) in the portfolio remains a drag on the portfolio's performance in the rising market. One new position was initiated during the month.

The principal positive contributors to performance in the month were Materials, Financials and Consumer Discretionary. In Materials, Bhushan Steel (weight 2.0%) rose 19.3%, after media reports suggested that their Japanese technology partner Sumitomo was in talks to take a 40% stake in their planned West Bengal plant. We top sliced our holding from 2.9% to 2%. United Phosphorus (weight 4.3%) rose 11.1% during the month on account of inexpensive valuations (11.3x FY12 vs. global average of 15x FY12) and reporting growth in revenues and improvement in margins. The price also received a boost from positive global news flow - Makhteshim Agan Industries Limited (MAIN IT) guiding to strong revenue growth in Q3. In Financials, Federal Bank (weight 2.6%) rose 20.4%. The newly joined MD and CEO Mr. Shyam Srinivasan (Ex consumer banking head of Standard Chartered Bank, India) shared his strategy going forward on risk management and improvement in asset quality, which was taken positively by the markets. Shriram Transport Finance (weight 1.6%) rose 13.6%. The stock was relatively flat during September, and better than expected results for the quarter ended September 2010 let to a sharp rise in the share price.  In Consumer Discretionary, S.Kumars Nationwide (weight 8.4%) bounced 4.7% from its recent technical lows. The company plans to file for the IPO of its subsidiary Reid & Taylor in November and has also finalised terms for external PE investment for its Belmonte subsidiary.

The main negative contributors to performance were the Industrials, Telecom, Healthcare and Consumer Staples sectors. In Industrials, Ahluwalia Contracts (weight 1.7%) corrected by 15.8% in the month due to market concerns relating to the Commonwealth Games contract and receivables of about INR0.7bn pending from Emaar. The company has clarified that its contracts have been executed properly and final payments should come in within the next 1-2 months. The company has net cash reserves of INR0.7bn and says that any delays in payments from Emaar will not have a material effect on its business.  Its order book position remains healthy - it has won orders of INR4.8bn in Q2FY11, an addition of 15% to the June-end order backlog of INR32bn which is 2x FY10 revenues.  IVRCL Infrastructures (weight 2.8%) was down 6.7% due to concerns over the heavy monsoon affecting second quarter results and also the delay in the sale of its subsidiary (Hindustan Dorr-Oliver). During the month IVRCL has received its first three international orders worth INR19.75bn.The order backlog now stands at about Rs221bn (4x FY10 revenues) and provides good visibility for future revenues. In Telecom, Bharti Airtel (weight 3.4%) was down 11.1% due to concerns on disappointing quarterly earnings. Its key competitor Idea Cellular also reported disappointing results with pressure on average revenue per user (ARPU). The increased regulatory uncertainty around interconnect charges, roaming charges and tariff transparency is also a concern. In Healthcare, Jubilant Life Sciences (weight 2.3%) was down 7.8% due to concerns over weak Q2FY11 results and a brisk exit by an FII investor from the stock. We remain positive on the company in view of its new products launches in H2FY11 and new order announcements in CRAMS (Contract Research and Manufacturing Services).

In addition to the weighting of cash and unlisted securities totalling 15.2% of the portfolio, performance was held back due to portfolio heavyweights, Prime Focus (8.0% weight) down 1.9% and Bilcare (5.6% weight) down 1.2% during the month.

Outlook

India's broader equity index, the BSE Sensex, was down 0.2% for the month. This was mainly due to:

·     Liquidity squeeze due to the Coal India IPO, India's largest ever IPO of $3.4bn, which attracted cash offers worth 15 times the stock available, from investors all over the world. Under Indian rules, investors' bids for the stock had to be fully funded, meaning they had to put up the equivalent of a total of $51bn in cash. That leaves about $48bn of capital still on the table waiting for the right opportunity in India after the oversubscribed amount was refunded on 1 Nov 2010.

·     India's 2^nd Quarter (Jul - Sep) earnings reporting season which began in October. The quarterly results so far have seen number of surprises and wide divergences within sectors although the management commentary has generally remained positive.  Investors appear to be awaiting the remaining results before increasing positions.

·     India's Industrial Production growth slowed to 5.6% in August, a 15-month low. Growth had dropped to 5.8% in June and rebounded to 15.2% in July.

The Reserve Bank of India on 2^ndNovember raised its repo rate - the rate at which the central bank lends to commercial banks - by 25 basis points to 6.25 % and increased the reverse repo rate by 25 basis points to 5.25%.  It fears that that a new round of quantitative easing in developed economies could flood emerging markets with fresh capital inflows, putting further upward pressure on global commodity prices. The RBI is also concerned about the structural dimension to food inflation in India, which is resulting in an increase in the prices of food items which is spilling over into prices of other commodities. One of its other concerns has been rising residential property prices, especially in the metropolitan areas, and in consequence new regulations on mortgage loans have been announced.  It has set its baseline projection for WPI inflation for March 2011 to 5.5%.   It has, however, maintained its economic growth forecast for the fiscal year at 8.5%, stating that the domestic economy is on a strong footing and is fast returning to its pre-crisis pace of growth.  

The Indian central bank is about the only central bank in Asia fundamentally comfortable with tightening independently of the US, reflecting the longstanding domestic demand driven nature of its economy and the resulting almost total absence of the export-orientated mercantilist bias, which is deeply entrenched amongst East Asian central bankers. We believe that India is likely to be a big beneficiary of near-zero interest rates, slower growth in the developed world and a strong domestic demand driven economy.

Analysis of holdings at 31 October 2010

Sector Summary	No. of Companies	% of Portfolio
Financials	11	26.4%
Consumer Discretionary	2	16.4%
Industrials	9	16.2%
Materials	4	10.8%
Health Care	3	10.4%
Telecom Services	2	6.1%
Energy	1	2.9%
IT	3	1.9%
Consumer Staples	1	1.4%
Total Equity Investment	36	92.5%
Net Cash		7.5%
Total Portfolio		100.0%

Top 10 equity holdings at 31 October 2010

Holding	Sector	% of Portfolio
S. Kumars Nationwide	Consumer Discretionary	8.4%
Prime Focus	Consumer Discretionary	8.0%
Marwadi Shares and Finance	Financials	7.8%
Bilcare	Health Care	5.6%
United Phosphorus	Materials	4.3%
Bharti Airtel	Telecom Services	3.4%
Sterlite Industries	Materials	2.9%
Cairn India	Energy	2.9%
IVRCL Infrastructures & Projects	Industrials	2.8%
Onmobile Global	Telecom Services	2.7%

Portfolio breakdown by size at 31 October 2010  

Size	No. of Companies	% of Portfolio
Small Cap  (M/Cap <INR 15bn)	11	29.2%
Mid Cap (INR 15bn <M/Cap<INR 100bn)	14	34.3%
Large Cap (M/Cap > INR 100bn)	9	21.2%
Unlisted	2	7.8%
Cash/Cash Equivalent		7.5%
Total	36	100.0%

 

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