Interim Results

RNS Number : 4602C

India Capital Growth Fund Limited

01 September 2008

1 September 2008

INDIA CAPITAL GROWTH FUND LIMITED

ANNOUNCEMENT OF INTERIM RESULTS FOR THE PERIOD ENDED 30 JUNE 2008

CHAIRMAN'S STATEMENT

After an excellent performance in 2007 it is extremely disappointing to report a fall of 59% in NAV in the first 6 months of 2008. The fall which was broadly in line with Indian indices was exacerbated by an 8% fall in the Rupee against Sterling.

India, as a major importer of oil in a fast growing economy, has been particularly vulnerable to the tripling in the price of oil in three years. This has added to already existent inflationary pressures to the extent that the rate of inflation is now in double figures. This in itself puts downward pressure on the exchange rate.

A combination of these factors, together with the turmoil in world financial markets, caused international investors finally to abandon the concept of 'decoupling' resulting in an indiscriminate sell off of stocks and withdrawal of funds.

A near halving of asset value in six months cannot be lightly dismissed and in such circumstances it behoves the Board to reappraise the shape of the portfolio and assess critically the performance of the Manager. The Company's stated objective is to invest for the longer term in predominantly smaller Indian companies. As can be seen in the Manager's detailed report the great majority of investee companies continue to trade well. The portfolio over the six month period has remained quite stable. We entered the downturn with a relatively high level of cash and modest amounts of net investment have been made mainly by adding to existing holdings at lower prices. I remain convinced on the strategy and can find little fault with the execution. I am persuaded that although the outlook for the Indian economy is more cloudy than previously, the main casualty is stock market sentiment.

In my previous statement I said the Indian stock market was in the foothills of a mighty range. I stick by this analogy but failed to mention that even foothills can contain steep ravines.

In the immediate future the Fund will continue to be affected by outside forces such as the oil price over which we have little control. At the time of writing there has already been a sharp fall in the oil price and, perhaps not coincidentally, a modest recovery in the NAV. With the Indian economy continuing to grow at nearly 8% per annum I am hopeful that we may have seen the worst.

Micky Ingall

Chairman

1 September 2008

SUMMARY INVESTMENT MANAGER'S REPORT

The first six months of 2008 have been the most difficult in the Company's two and a half year life. There has been a sharp and rapid fall in prices of Indian equities in an increasingly difficult macro-economic environment. Against this background investee companies continue to show good fundamental performance in terms of both growth and margins.

Market environment

The dominant issue affecting the Indian economy and stock markets in the first half of 2008 was the unprecedented rise in the price of oil and other commodities. India's domestic oil production has remained flat at between 32.2 million tonnes (in 1991) and 34.0 million tonnes (in the year to 31 March 2008) while demand has increased by 195% over the same period. Crude oil imports now form 34% of India's total imports (as against 11% for China) and this makes the Indian economy particularly sensitive to oil prices.

The rise in food prices does not, in our view, accurately reflect India's self sufficiency in the production of most key food items. Wheat production in India was 76.8 million tonnes (for the year ended March 2008), a record harvest. Other food grain and vegetable produce (excluding vegetable oils) is also expected to be sufficient. This year's weighted average rainfall across the country is now 2.4% above the normal. In particular, the rainfall in the key agricultural states of UP, Punjab and Haryana has been extremely good. However, despite the above, food prices have increased in the immediate past along with oil and commodity prices, fuelling inflation which as at 28 June 2008 stood at a thirteen year high of 11.89%.

The Indian Government subsidises the consumer price of oil and cooking gas as well as certain food grains, and these subsidies have taken a toll on government finances, with the fiscal deficit expected to increase to 4% of the GDP for the year ended March 2009 based on analyst reports.

The Reserve Bank of India ('RBI') has also reacted to rising inflation by increasing its lending rate to banks to 9%. The benchmark 10-year government bond yield is now at a seven year high of 9.31% (as at 31 July 2008).

Finally the Indian Rupee has depreciated against US Dollar and other major currencies due to the worsening trade and fiscal deficits, compounding the pressure on the Company's NAV which is reported in Sterling.

The other theme in the first half of 2008 was the effect on the Indian stock market of the global financial crisis. The first six months of 2008 saw foreign investors withdraw a net US$6.3 billion from the Indian market. The 'decoupling' theory for emerging markets could not stand the test of time and India joined other markets in finally bowing to downward pressure. Buying by domestic institutional investors (primarily mutual funds), a net US$2.2 billion in the period, could not prevent the fall in markets caused by the withdrawal of funds by foreign institutional investors ('FIIs').

We comment later in this report on the outlook for the economy (and will comment on specific company performance in the full Interim Report), but as yet the impact of the major economic changes noted above on individual companies remains to be seen. A survey of analysts by the RBI showed that real GDP growth rate estimates for FY2009 have been reduced from 8.1% to 7.9%, which is still a healthy rate of growth. Both GDP figures for the economy as a whole, and quarterly results to date for investee companies (for the period ended 30 June 2008) have shown an encouraging resilience.

On an historic trailing 12 month basis at least, company valuations now appear exceptionally attractive. On a simple measure of PE multiples, at 30 June 2008 the BSE Sensex traded at levels well below those in January 2006.

The following table shows how rapidly the equity market and select macroeconomic indicators have changed over the six months to 30 June 2008 along with the Company's NAV and share price changes.

Six months to 30 June 2008	31st December	30th June	Change
ICGF
NAV undiluted	164.1	67.4	↓58.9%
NAV fully diluted	153.4	67.4	↓56.1%
Share Price	129.0	63.3	↓51.4%
Equity Indices
BSE Sensex	20,287.0	13,461.6	↓33.6%
BSE MidCap Index	9,789.5	5,386.5	↓45.0%
BSE SmallCap Index	13,348.4	6,702.0	↓49.8%
Exchange Rates
INR - GBP	78.7	85.6	↓8.7%
INR - USD	39.4	43.0	↓8.2%
FII Net Investment over prior 6 months	+ USD 4.3bn	- USD 6.3bn
Brent Crude Futures USD (BBL)	91.9	140.6	↑52.9%
Inflation (WPI)	↑3.83%	↑11.89%
Interest Rates (RBI Repo Rate)	7.75%	8.50%	↑75bp

The portfolio performance as a whole

Despite holding a very concentrated portfolio of 27 stocks, each chosen on its individual merits, NAV performance (adjusted for the adverse exchange rate movement) has been in line with the small cap market index: down by 58.9% over the period. Those investee companies directly linked to the stock market have inevitably suffered severely - Prime Securities lost 85% of its value over the period - but others have seen equally sharp falls against a background of rising earnings. Within the portfolio 10 stocks closed the period over 60% below their December 2007 levels.

As the market fell sharply, individual investors and institutions sold heavily in response to margin funding pressures, triggering large price declines. Redemption pressures in offshore funds and the fallout from the US credit crisis also triggered some panic selling of shares in a flight to liquidity. These external factors drove down the value of a number of the Company's holdings.

Liquidity in many stocks in the Company's portfolio has been extremely thin. In small cap companies where we are one of the largest, if not the largest Foreign Institutional Investor, volatility has been extreme, often on the back of minimal trading volumes.

The portfolio companies themselves, however, have continued to perform well as shown by the results for the year to 31 March 2008 and the subsequently reported results for quarter to 30 June 2008. Comments on the individual results of the top 10 investee companies will be set out in the full Interim Report.

Summary of Activity 1 January 2008 to 30 June 2008.

Against the background of the flight of foreign capital, low liquidity and a worsening economic outlook we have retained a cautious approach to the market. In January we exited one major holding, Gruh Finance, with a view to reinvesting in more attractively priced opportunities. Since the period end, liquidity has been increased through disposals of two investee companies which became the targets of takeover offers - Hindustan Oil Exploration (which had been a new investment in early 2008) and Dabur Pharma - and we took advantage of both to sell at a profit.

We continue to see a regular flow of interesting companies and have added new investments to the portfolio where these meet our criteria and are available at appropriate prices. As the market declined we also added to some of our existing holdings where we felt that the stock prices offered exceptionally attractive valuations. The level of cash in the portfolio will allow us to maintain a steady flow of investment into new and existing companies.

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. These include shareholder communications, introductions 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. During the period we had representation on two investee company boards in a non-executive capacity.

We have not made any radical changes to the shape 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 both geographically and by industry, with a predominant focus on companies exposed to the domestic Indian growth story.

Looking forward

The unprecedented rise in oil prices, a deeply troubled US economy and a difficult economic environment in western economies have affected all emerging countries including India. India's star performing equity market in 2007 is now one of the worst performers in 2008. Yet India's expected GDP growth at around 8%, a reasonably good monsoon (in regions where it matters most) and above all a resilient business community that has learnt to operate in difficult situations all augur well for the future.

Not only are the Group's portfolio companies attractively valued, we are also confident that they will weather the current storm and continue to prosper. Thanks to two successful exits the Group has sufficient cash to look at new opportunities as well as increase its stake in existing investments.

Investors in the Company have exposure to an area of the Indian market that is not easily accessible to larger institutional investors, although as seen in the first half of this year this is an area of extreme volatility in terms of share prices. Long term private equity style investments need a corresponding longer time to bear fruit and when the worm turns and demand returns the illiquidity factor that has hit the portfolio so hard should act in reverse and repay our patience.

Finally the reputation of the Group as a solid shareholder, supporting management teams in difficult times, places us in a strong position to find new investments among India's stable of profitable and growing SMEs.

India Investment Partners Limited

1 September 2008

PRINCIPAL GROUP INVESTMENTS

AS AT 30 JUNE 2008

HOLDING	TYPE	SECTOR	VALUE £000'S	% of PORTFOLIO
HOLDING	TYPE	SECTOR	VALUE £000'S	% of PORTFOLIO
S Kumars Nationwide Limited	Mid Cap	Textiles	6,119	12.10
Prime Focus Limited	Small Cap	Media	4,012	7.94
Marawadi Shares and Finance Limited	Unlisted	Financial services	3,438	6.80
Varun Shipping Limited	Small Cap	Shipping	3,024	5.98
Hindustan Oil Exploration Company Limited	Small Cap	Oil & gas	2,475	4.90
Grabal Alok Impex Limited	Small Cap	Textiles	2,459	4.87
IT People India Limited	Small Cap	IT	2,197	4.35
Logix Microsystems Limited	Small Cap	IT	1,986	3.93
Akruti City Limited	Large Cap	Housing & construction	1,895	3.75
Viceroy Hotels Limited	Small Cap	Hotels	1,615	3.20
Total top 10 investments			29,220	57.82
Other Small and Mid Cap (15 companies)			15,740	31.15
Other Unlisted (2 companies)			325	0.64
Total invested assets			45,285	89.61
Net current assets			5,248	10.39
Total Portfolio			50,533	100.00

UNAUDITED CONSOLIDATED INCOME STATEMENT

FOR THE PERIOD ENDED 30 JUNE 2008

			01.01.08 to	01.01.07 to	01.01.07 to
			30.06.08	30.06.07	31.12.07
	Revenue £000	Capital £000	Total £000	Total £000	Total £000
	Revenue £000	Capital £000	Total £000	Total £000	Total £000
Income
Fixed deposit interest	105	-	105	71	187
Bank interest income	11	-	11	22	32
Investment income	178	-	178	238	625
	294	-	294	331	844

Net (losses)/gains on financial assets at fair value through profit or loss
Market movements	-	(67,637)	(67,637)	19,650	62,142
Foreign exchange movements	-	(4,204)	(4,204)	(841)	667

Total income	294	(71,841)	(71,547)	19,050	63,653

Expenses
Management fee	(548)	-	(548)	(558)	(1,274)
Performance fee	-	-	-	(626)	(8,280)
Cost of acquisitions and disposal of investments	-	(111)	(111)	(126)	(317)
Other expenses	(355)	61	(294)	(292)	(640)
Total expenses	(903)	(50)	(953)	(1,602)	(10,511)

(Loss)/profit for the period/year before taxation	(609)	(71,891)	(72,500)	17,448	53,142
Taxation	(7)	-	(7)	-	(18)
(Loss)/profit for the period/year after taxation	(616)	(71,891)	(72,507)	17,448	53,124

(Loss)/earnings per Ordinary Share - Basic (pence)			(96.68)	23.27	70.83

(Loss)/earnings per Ordinary Share - Diluted (pence)			(96.68)	23.27	70.63

The total column of this statement represents the Group's Income Statement, 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 PERIOD FROM 1 JANUARY 2008 TO 30 JUNE 2008

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2008	750	(2,729)	52,713	(571)	72,877	123,040
Gain/(loss) 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

UNAUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD FROM 1 JANUARY 2007 TO 30 JUNE 2007

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2007	750	(285)	(3,913)	487	72,877	69,916
(Loss)/gain on investments	-	(2,101)	21,661	-	-	19,650
Revenue loss for the period after taxation (excluding foreign exchange losses)	-	(626)	-	(509)	-	(1,135)
Cost of acquisition and disposal of investments	-	(61)	(65)	-	-	(126)
(Loss)/gain on foreign currency	-	(1,477)	626	-	-	(851)
Balance as at 30 June 2007	750	(4,550)	18,309	(22)	72,877	87,364

AUDITED CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE PERIOD FROM 1 JANUARY 2007 TO 31 DECEMBER 2007

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2007	750	(285)	(3,913)	487	72,877	69,916
Gain on investments	-	7,515	54,627	-	-	62,142
Revenue loss for the year after taxation (excluding foreign exchange losses)	-	-	-	(1,058)	-	(1,058)
Cost of acquisition and disposal of investments	-	(136)	(181)	-	-	(317)
(Loss)/gain on foreign currency	-	(1,543)	2,180	-	-	637
Other expenses charged to capital	-	(8,280)	-	-	-	(8,280)
Balance as at 31 December 2007	750	(2,729)	52,713	(571)	72,877	123,040

UNAUDITED CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 30 JUNE 2008

	30.06.08	30.06.07	31.12.07
	£000	£000	£000
Non-current assets
Financial assets designated at fair value through profit or loss	45,285	82,306	117,935

Current assets
Cash and cash equivalents	5,637	6,067	9,944
Receivables	13	93	3,203
	5,650	6,160	13,147
Current liabilities
Payables	(402)	(1,102)	(8,042)

Net current assets	5,248	5,058	5,105

Total assets less current liabilities	50,533	87,364	123,040

Equity
Ordinary share capital	750	750	750
Reserves	49,783	86,614	122,290

Total equity	50,533	87,364	123,040

Number of Ordinary Shares in issue	75,000,000	75,000,000	75,000,000

Undiluted Net Asset Value per Ordinary Share (pence)	67.38	116.48	164.05

Fully diluted Net Asset Value per Ordinary Share (pence)	67.38	113.74	153.38

UNAUDITED CONSOLIDATED CASH FLOW STATEMENT

FOR THE PERIOD ENDED 30 JUNE 2008

	01.01.08 to	01.01.07 to	01.01.07 to
	30.06.08	30.06.07	31.12.07
	£000	£000	£000
Cash flows from operating activities
Investment income	179	198	648
Fixed deposit interest	105	71	187
Bank interest	13	22	29
Management fee	(653)	(539)	(1,196)
Performance fees	(7,654)	-	(626)
Other cash payments	(304)	(320)	(561)
Net cash outflow from operating activities	(8,314)	(568)	(1,519)

Cash flows from investing activities
Purchase of investments	(30,772)	(19,887)	(37,908)
Sale of investments	35,015	17,566	40,629
Transaction charges relating to the purchase and sale of investments	(111)	(126)	(316)
Net cash inflow/(outflow) from investing activities	4,132	(2,447)	2,405

Net (decrease)/increase in cash and cash equivalents during the period/year	(4,182)	(3,015)	886

Cash and cash equivalents at the start of the period/year	9,944	9,082	9,082
Exchange losses on cash and cash equivalents	(125)	-	(24)
Cash and cash equivalents at the end of the period/year	5,637	6,067	9,944

The full Interim Report together with the unaudited accounts for the period are expected to be mailed to shareholders on 5 September 2008 and a copy will be posted on the Company's website www.indiacapitalgrowth.com.