Aberdeen New India Invest Trust (ANII) has announced its annual results for the year ended 31 March 2017. During the period, the company’s NAV per share rose by 34.7% to reach 487.9p. The ordinary share price rose by 40.9% to 441.5p. This reflected a narrowing of the discount to net asset value from 13.5% to 9.5% as at 31 March 2017. By comparison, the company says that the benchmark MSCI India Index (Sterling-adjusted total return) rose by 36.1%. Over the five years ended 31 March 2017, the NAV per share and benchmark total return increased by 100.0% and 73.1%, respectively.
Market backdrop
ANII’s chairman, Hasan Askari, says in his statement that Indian equities made sizeable gains in the year under review, despite some periods of short-term stress. He says that investors were encouraged by the increased pace of reforms enacted by Prime Minister Narendra Modi’s government, and positive economic data that pointed to an exceptional rate of growth. Domestic stocks remained fairly resilient, and largely insulated from the twin external shocks of Brexit and Donald Trump’s election victory, as well as the Federal Reserve’s two well-flagged interest rate hikes.
Hasan says that the passing of the goods and services (GST) bill, ten years in the making, was perhaps the high point in terms of policy reforms for Mr Modi during the year. New legislation will consolidate a taxation system, fragmented by state, into a more unified national regime. He says that this should make inter-state trade less cumbersome for businesses and improve efficiencies and cost controls. Although logistical challenges remain ahead of the GST’s nation-wide roll-out, the long-term benefits are apparent in his view.
Mr Modi’s surprise decision to demonetise high-denomination Rupee notes as part of a crackdown on corruption dented sentiment in the immediate aftermath. Hasan says that, in the ensuing chaos, India’s cash-reliant masses endured long queues at banks, and corporates had to contend with supply-chain disruption and more subdued consumer spending, particularly in the discretionary segment. However, he says that ANII’s portfolio appears to have weathered the storm well. Hasan says that many posted resilient December-quarter earnings, demonstrating skill in adjusting to the challenges posed by the liquidity squeeze. While he says that it was poorly executed in the initial stages, the cash crunch began to recede within months and that the BJP government appeared to have been vindicated when it won key state elections, including in the crucial state of Uttar Pradesh. Hasan says that this should give Mr Modi more leeway to continue pushing forward with his reform agenda.
Performance
ANII’s NAV grew by 34.7% in Sterling terms in the year ended 31 March 2017, while the share price rose by 40.9%, versus the benchmark MSCI India Index’s total return of 36.1%. The manager says that the health-care and IT sectors were the key drivers of the market’s performance and that the small under-performance of the Company’s NAV against the Index was due to the overweight in consumer and material companies whose activities were most affected, temporarily, by demonetisation.
Piramal Enterprises, was the single biggest contributor to relative performance. Although categorised as a health-care stock, the manager says that it has a fast-growing financial services arm and news of plans to split the company into two separate entities propelled its share price upwards. The manager says that the move should unlock value for the conglomerate by spinning off its unrelated businesses. Biocon reportedly rallied on optimism over the filing of four new generic drugs in the EU and US over the next year. manager says that the portfolio benefited further from not holding Dr Reddy’s Laboratories, seemingly embroiled in a US price collusion probe. The gains, however, were pared by the small position in GlaxoSmithKline Pharmaceutical, as its share price succumbed to disappointing results, US regulatory and pricing pressures, as well as domestic drug price controls.
The manager says that the underweight to the IT sector also aided performance. The manager says that the operating environment turned more unpredictable as Western clients cut back on their IT spending and US President Trump threatened to clamp down on foreign talent. The underweight to Infosys, which fared less well, also contributed positively. Infosys posted lacklustre results and downgraded its outlook, owing to unexpected setbacks in discretionary spending on consulting services, package implementation and project ramp-ups.
The manager says that, in the consumer staples sector, stock selection was positive. Cigarette maker ITC posted decent quarterly results and benefited from the GST council’s decision to leave rates unchanged for tobacco, while Godrej Consumer Products’ share price was underpinned by continued healthy growth both domestically and overseas. However, the reverse was true for the consumer discretionary sector, as stock selection detracted. The manager says that this sector was hurt disproportionately by demonetisation, as consumers delayed buying big-ticket items like two- and four-wheelers. Hero MotoCorp underperformed, with sales volumes declining by 15% in November, largely in line with its peers.
Among financial holdings, HDFC Bank and Kotak Mahindra Bank both gained from demonetisation, posting solid income growth driven largely by net interest incom, according to the manager. Similarly, The manager says that Gruh Finance’s earnings were driven by higher net interest income and a tighter rein on operating expenses, despite higher provisions. Not holding Axis Bank was also positive, after the lender’s bad loan provisions increased sharply.
The manager comments that the overweight to materials buoyed performance, as the sector rebounded on stable prices and a recovery in volumes. This, however, was overshadowed by the underlying cement and paints holdings, as demonetisation hurt the supply chains of the two largely cash-based sectors in the short term. Ambuja Cements, ACC and Asian Paints underperformed, although benign raw material costs helped boost the bottom lines of Grasim Industries and Kansai Nerolac Paints.
Elsewhere, utility company Gujarat Gas was a key contributor.The manager says that it was aided by a pick-up in volumes, as gas is competitively priced with other alternatives, and by effective cost management. In contrast, stock selection in the industrials sector dragged down performance. The manager says that Container Corporation faced an anaemic trade environment and tariff pressures from Indian Railways, while power and automation equipment maker ABB India has yet to see significant earnings growth that would support its relatively high valuations, although it continues to benefit from lower raw material and financing costs.
The underweight to energy detracte. The manager says that the sector was buoyed by stabilising commodity prices. Not holding energy heavyweights Reliance Industries and Vedanta also hurt the fund.
Portfolio activity
The manager says that, during the year, it diversified the portfolio’s exposure to the IT software sector by initiating a position in Cognizant Technology Solutions. It also introduced energy and environment engineering company Thermax, which makes boilers, heaters and chillers as well as offers water treatment and air pollution control services. ANII’s manager says that Thermax’s management is conservative and has demonstrated good financial discipline. The company also reportedly offers exposure to a recovery in the domestic capital goods sector. Another new holding was Aegis Logistics, which handles bulk liquids and LPG. The manager says that Aegis has successfully utilised its first-mover advantage to establish a strategic network of terminals close to client and that it has solid operations, a robust balance sheet and good growth potential. A position in Asian Paints, the domestic leader in decorative paints, was also initiated when the market corrected on demonetisation fears.
The manager continued to build positions in Sun Pharmaceutical, which it says is well-managed and an industry leader but has experienced recent price softness, and Jyothy Laboratories, given its solid portfolio of household products, potential for nationwide expansion and the ability of management to follow through on its plans.
The manager also switched partially from ICICI Bank to Kotak Mahindra Bank which it says appears better-placed to gain from a domestic economic recovery. It further trimmed the position in ICICI Bank at the end of the review period, taking profits as it rebalanced the portfolio to selectively position for a credit recovery while reducing the risk of exposure to stress in the banking system. There was also a partial switch from Bharti Airtel to Bharti Infratel, which the manager says appears more poised to benefit from increased competition from new players entering the telecommunications sector.
Linde India was sold, following a solid rally, along with Tata Power, which the manager says continued to face regulatory uncertainties and made acquisitions despite its weak balance sheet. It also divested Jammu & Kashmir Bank, given the deterioration of its asset quality and balance sheet.
The manager reduced the portfolio’s lower conviction holdings in ACC India and Lupin, while it took profits from Piramal on relative share price strength and trimmed Godrej Consumer Products as well.
Outlook
The manager says that India remains a domestically-focused economy, and that this insulates it from much of the global volatility that affects other emerging markets. However, it says that India is not completely immune to the shifting patterns of world trade, a revival in US protectionism or changes in commodity prices and that, in fact, a higher oil price is a key risk for Indian corporates, as it could aggravate costs and put pressure on margins, while visa restrictions could adversely hit outsourcing companies in the IT sector.
At home, the manager says that the Modi government continues to make good on some of its pledges to liberalise the Indian economy and ease the cost of doing business. In the manger’s veiw, demonetisation has been a significant long-term positive for the country despite the short-term pain. It says that demonetisation has created an opportunity to clamp down on corruption, widen the tax net, bringing the informal sector into the fold, and adding momentum to becoming a cashless society. The manager says that there may be some disruption when GST is first implemented, but that most businesses seem optimistic that it will help improve logistics and cut costs in the long term. However, both consumer spending and capital investment remain muted and some structural reforms such as bank recapitalisation have not been addressed as yet. Nevertheless, the manager says that the overall economic outlook is positive and should present investors with periodic opportunities to add to their current positions.
Aberdeen New India NAV returns 35%, mildly underperforming benchmark : ANII