Preliminary Results

RNS Number : 2613I

India Capital Growth Fund Limited

09 March 2010

 

9 March 2010

INDIA CAPITAL GROWTH FUND LIMITED

PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2009

CHAIRMAN'S STATEMENT

This is my first statement to shareholders since my appointment to the Board at the end of September last year. I am much enjoying the opportunity to become more involved with India, and I have already had the opportunity to visit and to spend time with the fund manager and the team at the investment adviser and to meet with businessmen and economists. India is indeed a country with enormous potential, but this has been obvious for some time. What we can begin to see now, however, is a greater likelihood that the new Government will actually deliver on the promises of reform and progress that previous administrations have made but not achieved. 

In many ways 2009 was a disappointing year for the Company. The second half of 2009 saw the Net Asset Value (NAV) rise by 22.9%, giving an overall increase for the year of 39%. The Company's assets are explicitly unhedged against the Indian Rupee, and the decline in its value against Sterling of around 7% held back performance. Even so, our NAV rise was well below that of the local indices. The year as a whole saw highly volatile markets with marked falls in the early months which were only really halted once the result of the Indian general election were known. At that point, with overseas investor confidence restored somewhat, the markets took off and the leading stocks index, the BSE Sensex, ended the year up 81%, and 117% above its low point.

The Company's share price was equally volatile. Having started the year at a 32% discount to NAV, at the half year this discount had narrowed to a little under 9%. In the second half year, despite a NAV rise of nearly 23% the share price actually fell by 7% returning the discount to over 30%. Since the year-end, however, the discount has started to narrow again and at 28 February was just under 13.5%.

The Board instigated a review of the investment policy and strategy in the light of the continuing underperformance of the portfolio relative to the market indices. The Manager has responded by the appointment of a new fund manager with a successful track record of investing in the region to oversee the Company's investments. The Manager has also recommended a change of approach, while remaining true to the core investment policy of focussing on the mid and small cap sectors in India. This change of approach is likely to lead to a less concentrated portfolio, reducing the risks of individual stock performance having an undue influence over the portfolio as a whole. It will be accompanied by a greater emphasis on liquidity in the underlying investments, improving the ability of the Manager to implement tactical decisions quickly. The Board is supportive of these developments.

At home, the Company is continuing to monitor the developments in the proposed EU Directive (AIFM) seeking further to regulate the financial services sector. Although primarily aimed at hedge funds and private equity funds, the politicians and bureaucrats in Brussels have chosen to apply the proposals to all non-UCITS investment vehicles. This has a potentially damaging effect on the whole of the closed-end fund industry, and we are wholly supportive of the efforts of the Association of Investment Companies in their lobbying. While the risk that this legislation may force the winding up of investment companies appears to be receding there remain potentially significant implications, not least for non-EU domiciled companies investing outside the EU.

Looking forward, the Indian economy is continuing to grow at over 7% per annum, and with a stable government committed to developing infrastructure and education the outlook is positive. The challenge remains inflation. Recent years have also shown that although India is predominantly a domestic economy and its financial system and institutions are largely insulated from the problems which have been seen elsewhere, it is not immune to the risks of contagion from adverse events elsewhere in the world. 2010 may again be difficult, but I believe we are stronger and better able to meet the challenges ahead.

Fred Carr

Chairman

8 March 2010

SUMMARY INVESTMENT MANAGER'S REPORT

Summary

The extreme volatility experienced since the launch of the Company in December 2005 continued into 2009, with Indian stock market indices falling to 4 year lows in March but rebounding sharply to end the year significantly ahead. The economy showed relative stability, in contrast to many other western and emerging markets; corporate profits held up; and foreign portfolio fund inflows were strong. All these contributed to record rises in all the local indices.

2009 was a positive year for ICGF in absolute terms as NAV rose 39%. Performance nevertheless lagged the Indian indices yet again, which was clearly disappointing and has prompted some resetting of the investment strategy within the Company's overall remit to invest in mid and small cap companies in India.

Market environment - the economy

Having opened with continuing uncertainty over the future of the global economy and its impact on the Indian economic growth, 2009 saw two key events: first, the general election in May; and second a poor monsoon. The former delivered an unexpected but clear majority for the Indian National Congress (INC) and a clear mandate to continue their economic growth policies with special focus on issues such as infrastructure creation and education. Domestic and foreign investors responded enthusiastically, with the BSE Sensex hitting the +20% circuit limit on 18 May. The immediate impact of the poor monsoon was a rise in food prices with a consequent upward effect on inflation. Nevertheless the overall picture for the Indian economy was positive, with estimates for GDP growth and corporate earnings regularly upgraded and FDI and FII inflows continuing.

The Reserve Bank of India (RBI) revised its annual GDP growth forecast for the year to 31 March 2010 to 7.5% in its third quarter monetary policy review in January 2010 from the 6% it had predicted during the second quarter monetary policy review in October 2009. This revision was on the back of better than expected GDP growth of 7.9% per annum in the quarter to 30 September 2009, a consolidation of recovery in industrial production and a pick-up in exports in November after 13 straight months of decline.

The RBI reduced the policy rates (repo and reverse repo) in line with falling inflation in the first half of 2009. The wholesale prices index (WPI) fell from 5.5% in January 2009 to -1% in June 2009, mainly driven by the large base effect of 2008. However from July 2009 onwards inflation started rising again. Indian agriculture was affected by a poor monsoon and by the year end food inflation was 18% per annum. In January 2010, the RBI increased the Cash Reserve Ratio (CRR) by 75bps but refrained from increasing policy rates. The objective was threefold: a reduction in excess liquidity to control inflation; economic recovery without comprising price stability; and a calibrated exit from the looser monetary policy pursued to date.

Stock markets

The slide in the Indian stock market that began in early 2008 continued through the beginning of 2009 due to lingering uncertainty regarding the global recovery, as foreign investors withdrew funds. In March 2009, the BSE Sensex fell to its lowest level in over four years. However investor confidence returned in the spring, stimulated by the unexpected election result, and markets rebounded during the next three quarters. In terms of trailing twelve month PE multiples, at 31 December 2009 the BSE Sensex had returned to its pre-2008 PE multiple of 22x. 

Portfolio performance and investment strategy 1 January 2009 to 31 December 2009

Performance

Against a background of very strong markets, ICGF's NAV rose 39%, a disappointing performance when measured against the performance of the indices. Exchange rates did move against us, with the rupee depreciating by over 7% against sterling during the year. However, with a concentrated portfolio that we did not actively trade, ICGF was exposed to the underperformance of three of our top five holdings (Bilcare, Varun Shipping and ICSA).

We also remained cautious about the strength of the market recovery during the year, holding an average of 16% in cash for the first three quarters. Towards the end of the year we took advantage of market levels to sell out of a number of the less liquid and "micro cap" stocks, so that by the year end there were only 15 companies in the portfolio of which the top 5 made up 45% and the top 10 made up 67% of the portfolio.  As at 31 December, 26.7% of the fund was held in cash or near cash.

Future strategy

During the latter part of the year, following discussion with the Board, steps were taken to address the issue of portfolio underperformance. On 4 January 2010 it was announced that David Cornell had joined the investment management team at India Investment Partners Limited from Henderson New Star. David's career has been resolutely focused on emerging markets: after periods with Flemings and Salomons he joined BDT in 2004 to launch the BDT Global Emerging Market Fund before moving in 2008 to New Star Institutional Managers to co-manage the New Star Emerging Market Fund and the global equity portfolios' growing exposure to emerging markets.

Going forward, David will be involved in the management of the ICGF portfolio focusing on ICGF's core investment philosophy but with a different implementation style and process:

• ICGF will continue to focus on mid and small cap Indian stocks, but there will be increased emphasis on liquidity;

• The portfolio will be less concentrated; and

• While backing long term structural themes, ICGF will approach the investments in a pragmatic way and where appropriate take advantage of market volatility.

Conclusion

Under David Cornell's management ICGF's emphasis will remain strictly focused on the mid and small cap sector of the market. It is intended, however, to adopt a more disciplined investment process: identifying medium to long term strategic thematic trends prevalent in the market and exploiting those through selecting companies expected to benefit from those themes. Stocks are initially screened to ensure they meet liquidity requirements before being subject to rigorous analysis of the management and the business model. An EVA approach will be used to assess the extent of shareholder value creation in the context of the current stock market valuation. Whilst ICGF will maintain its core philosophy, a more pragmatic approach to taking profit in stocks that have performed well can be expected.

In the last quarter of 2009 the fund was able to take advantage of strength in the markets to exit some of the lesser liquid positions to raise cash. As at year end the overall level of cash (including short-term debt mutual fund holdings) was 26.7%. It is intended to take advantage of market conditions early in 2010 to invest this cash following the principles discussed above. For the most part it is intended to run a fully invested portfolio.

Outlook

Investors in India in 2010 can take great confidence from the resilient performance of 2009 as the economy continued its recovery path. Growth throughout the year has come in well ahead of expectations and has been achieved in spite of an election that brought the country to a standstill ahead of the results, and a disastrous monsoon. It was the surprising resilience of the consumer, both rural and urban, that contributed to this growth; it is this factor that is most exciting for 2010. Consumer habits are changing, aided by greater accessibility and affordability and these are likely to improve looking forward.  In addition we have an unencumbered government in its second year of a five year term and this brings cautious optimism that bold steps towards public sector divestment, re-organisation of the tax structure and liberalisation of the insurance sector will be taken. At a corporate level, however, companies were reluctant to invest in 2009 and we will need evidence that this is changing to hold onto our positive view.

The major concern for the market looking forward is inflation and the speed and severity of the RBI's attempts to quash it. Food is the major culprit, but there is evidence of raw material price pressure and wage inflation creeping back. The RBI has already started to drain liquidity through an increase in the cash reserve ratio, but we await the market's reaction to the first upward move in interest rates since early 2008. Whilst a wobble is inevitable, we are of the view that the first upward move in interest rates is a signal of economic strength, while keeping rates very supportive for growth. This scenario augurs well for Indian stock markets in 2010.

India Investment Partners Limited

8 March 2010

INVESTING POLICY

The Group's investment objective is to provide long-term capital appreciation by investing (directly and indirectly) in companies based in India. The investment policy permits the Group to make investments in a range of Indian equity and equity linked securities and predominantly in listed mid and small cap Indian companies with a smaller proportion in unlisted Indian companies. Investment may also be made in large-cap listed Indian companies and in companies incorporated outside India which have significant operations or markets in India. While the principal focus is on investment in listed or unlisted equity securities or equity linked securities, the Group has the flexibility to invest in bonds (including non-investment grade bonds), convertibles and other types of securities. The Group may, for the purposes of hedging and investing, use derivative instruments such as financial futures, options and warrants. The Group may, from time to time, use borrowings to provide short-term liquidity and, if the Directors deem it prudent, for longer term purposes. The Directors intend to restrict borrowings on a longer term basis to a maximum amount equal to 25 per cent. of the net assets of the Group at the time of the drawdown. It is the Group's declared policy not to hedge the exposure to the Indian Rupee.

PRINCIPAL GROUP INVESTMENTS

AS AT 31 DECEMBER 2009

HOLDING	TYPE	SECTOR	VALUE £000'S	% of PORTFOLIO
S Kumars Nationwide Limited	Mid Cap	Textiles	5,417	12.12
Marwadi Shares and Finance Limited	Unlisted	Financial services	4,275	9.57
Bilcare Limited	Small Cap	Pharmaceutical services & packaging	3,834	8.58
ICSA India Limited	Small Cap	Process controls	3,297	7.38
SpiceJet Limited	Small Cap	Airlines	3,247	7.27
Prime Focus Limited	Small Cap	Media	3,181	7.12
Varun Shipping Limited	Small Cap	Shipping	2,969	6.64
Arihant Foundations and Housing Limited	Small Cap	Housing & Construction	1,268	2.84
Grabal Alok Impex Limited	Small Cap	Textiles	1,266	2.83
MSK Projects (India) Limited	Small Cap	Housing & Construction	1,178	2.64
Total top 10 investments			29,932	66.99
Other Small Cap (4 companies)			2,826	6.32
Other Unlisted (1 company)			-	-
Total equity investments			32,758	73.31
Debt mutual funds			10,636	23.80
Cash and other net current assets			1,292	2.89
Total Portfolio			44,686	100.00

CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME

FOR THE YEAR ENDED 31 DECEMBER 2009

				Year to	Year to
				31.12.09	31.12.08
		Revenue £000	Capital £000	Total £000	Total £000
Income
Fixed deposit interest		1	-	1	150
Bank interest income		1	-	1	16
Investment income		292	-	292	553
		294	-	294	719
Net gains/(losses) on financial assets at fair value through profit or loss
Market movements		-	19,746	19,746	(103,617)
Foreign exchange movements		-	(6,328)	(6,328)	13,289
		-	13,418	13,418	(90,328)
Total income		294	13,418	13,712	(89,609)
Expenses
Management fee		(535)	-	(535)	(849)
Cost of acquisitions and disposal of investments		-	(31)	(31)	(160)
Foreign exchange (losses)/gains		(153)	(8)	(161)	187
Other expenses		(450)	-	(450)	(441)
Total expenses		(1,138)	(39)	(1,177)	(1,263)
Profit/(loss) for the year before taxation		(844)	13,379	12,535	(90,872)
Taxation		-	-	-	(17)
Profit/(loss) for the year after taxation		(844)	13,379	12,535	(90,889)
Earnings/(loss) per Ordinary Share - Basic (pence)				16.71	(121.19)
Earnings/(loss) per Ordinary Share - Diluted (pence)				16.71	(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.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 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	-	(18,283)	38,029	-	-	19,746
Revenue loss for the year after taxation (excluding foreign exchange losses)	-	-	-	(844)	-	(844)
Cost of acquisition and disposal of investments	-	(29)	(2)	-	-	(31)
(Loss)/gain on foreign currency	-	2,436	(8,772)	-	-	(6,336)
Balance as at 31 December 2009	750	(13,187)	(13,818)	(1,936)	72,877	44,686

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

CONSOLIDATED STATEMENT OF FINANCIAL POSITION

AS AT 31 DECEMBER 2009

		31.12.09		31.12.08
		£000		£000
Non-current assets
Financial assets designated at fair value through profit or loss		43,394		28,915
Current assets
Cash and cash equivalents		1,434		3,431
Receivables		10		8
		1,444		3,439
Current liabilities
Payables		(152)		(203)
Net current assets		1,292		3,236
Total assets less current liabilities		44,686		32,151
Equity
Ordinary share capital		750		750
Reserves		43,936		31,401
Total equity		44,686		32,151
Number of Ordinary Shares in issue		75,000,063		75,000,000
Undiluted Net Asset Value per Ordinary Share (pence)		59.58		42.87
Fully diluted Net Asset Value per Ordinary Share (pence)		59.58		42.87

CONSOLIDATED STATEMENT OF CASH FLOWS

FOR THE YEAR ENDED 31 DECEMBER 2009

		Year to		Year to
		31.12.09		31.12.08
		£000		£000
Cash flows from operating activities
Investment income		292		554
Fixed deposit interest		1		150
Bank interest		1		19
Management fee		(519)		(975)
Performance fees		-		(7,654)
Other cash payments		(498)		(422)
Net cash outflow from operating activities		(723)		(8,328)
Cash flows from investing activities
Purchase of investments		(10,962)		(40,249)
Sale of investments		9,872		42,157
Transaction charges relating to the purchase and sale of investments		(31)		(160)
Net cash (outflow)/inflow from investing activities		(1,121)		1,748
Net decrease in cash and cash equivalents during the year		(1,844)		(6,580)
Cash and cash equivalents at the start of the year		3,431		9,944
Exchange (losses)/gains on cash and cash equivalents		(153)		67
Cash and cash equivalents at the end of the year		1,434		3,431

This preliminary announcement was approved by the Board on 8 March 2010. It is not the Company's statutory accounts, but has been prepared on the same basis as those accounts. The statutory accounts for the year ended 31 December 2009 have been approved and audited and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The full Annual Report together with the audited accounts for the year is expected to be mailed to shareholders on 15 March 2010 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)

David Cornell                 020 7802 8904

Arbuthnot Securities Limited (NOMAD)

Alastair Moreton              020 7012 2000

 

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