New India Investment Trust has announced its annual results for the year ended 31 March 2016. During the year the trust provided an NAV total return of -6.1% and, reflecting a widening of the discount during the period (from 8.7% to 13.5%), a share price total return of -11.0% (all in sterling terms). This compares against the return for its MSCI Index benchmark index of -10.3%. The managers say that the relative outperformance was due largely to the resilience across the majority of the company’s holdings.
In terms of performance attribution, the manager says that the company’s consumer exposure contributed the most to performance. Specifically, they say that Godrej Consumer Products profited from the steady recovery in fast-moving consumer goods, capturing market share in core segments. The managers say that another solid performer was Hero Motocorp, as its share price was buoyed by robust profits and expectations that the latest budget would increase rural demand for vehicles. Similarly, they comment that these hopes also mitigated auto-parts maker Bosch India’s share price decline on profit-taking, following a run-up earlier in the year. The underweight to health care proved beneficial, as the sector suffered from negative regulatory developments both in India and from the repercussions of the US Food and Drug Administration’s (FDA) plant inspections in late 2015. The managers say that, among their holdings, Piramal Enterprises and Sanofi India did well on the back of decent earnings, but Sun Pharmaceutical and Lupin bore the brunt of stringent US FDA audits. As a result, they say that the underweight to Sun was positive, but the non-benchmark position in Lupin detracted. The managers say that the company’s materials holdings contributed significantly, led by Kansai Nerolac Paints, as, in their view, falling raw material costs boosted its margins. Cement stocks also outperformed, with the government committing to more infrastructure spending in rural areas and low-cost homes, bolstering demand. Ultratech Cement’s share price rallied, indirectly benefiting its parent, Grasim Industries. The managers also say that Grasim’s non-cement businesses were in fine fettle, with improving prices and margins in the viscose fibre segment and a growing market share in caustic soda. However, they say that Linde Indiaperformed below par, as it suffered higher fuel costs as well as lower usage rates and project engineering margins.
The managers say that an underweight position to the resilient information technology sector held back relative performance, but that this was more than offset by the positive contributions from the company’s individual holdings. They advise that, following a protracted period of underwhelming results, Mphasis posted a good quarterly performance in a robust comeback. Recently, its majority shareholder HP agreed to sell up to 60% of Mphasis to private equity investor Blackstone, with the latter also offering to buy another 26% from other investors. The managers say that they are monitoring developments and plan to contact Blackstone to understand its intentions as a potential majority shareholder. The company is invested in Infosys, which the managers see as a core holding, but its underweight position detracted. The managers comment that the IT services provider delivered better-than-expected results, amid hopes that chief executive Vishal Sikka could engineer a return to its halcyon days. The managers say that the company’s financial holdings were weak in light of the sector sell-off which they say was sparked by fears over stressed assets and poor lending practices among state banks. The company only hold private-sector lenders, which, in the managers view, are in far better shape than their state-owned peers. Specifically, the company’s holding HDFC reported consistent loan growth, while asset quality remained stable. The company’s non-benchmark exposure to Kotak Mahindra Bank was also positive, as its share price rose on optimism over its merger with ING Vysya, while the Reserve Bank of India (RBI) gave its blessings to Kotak’s foray into general insurance, the only area where it has yet to be present. However, the managers say that ICICI Bank was hurt by deterioration in non-performing loans and a spike in provisions, after the RBI’s tougher stance on high-risk assets. The managers say that, proving most costly, was the lack of exposure to the energy sector in the portfolio. They say that this is because they do not hold index heavyweight Reliance Industries and that, despite low oil prices, Reliance was buoyed by the expected launch of its telecom venture, Reliance Jio, and a resilient petrochemical business. We maintain our view that we can find higher-quality alternatives with a better emphasis on shareholder value.
In terms of portfolio activity, GAIL India, the country’s biggest gas distributor, was sold because the managers were disappointed with its performance amid a difficult operating environment in the face of regulatory uncertainty. Conversely, they initiated a position in Emami, a fast-moving consumer goods company. Founded in 1974 and listed in 1995, the Kolkata-based company has, what the managers describe as, an excellent portfolio of popular consumer brands. Its management includes members of the founding families and the managers say it has a good track record of investing in the business to build up its brands. The managers also introduced Jyothy Laboratories, which they say is on account of its solid portfolio of household products, potential for nationwide expansion and the ability of its management to follow through on its plans.
In terms of outlook, the managers say that, while India is more insulated from external events than most of its regional peers, its markets are still affected by global events. Given the largely listless world economy and widespread investor sensitivity to fluctuating commodity prices and central bank rhetoric, further market volatility is likely. However, they believe that Indian companies remain fundamentally sound but that earnings continue to be affected by sluggish demand. They say that share prices are unlikely to re-rate significantly until consumption and the private investment recover. Nevertheless, they believe that the budget’s focus on farmers should encourage rural spending, while the boost in funds allocated for infrastructure development bodes well for the materials sector in particular. Elsewhere, they comment that the banking sector remains under considerable stress from the increase in non-performing loans but that, to its credit, the RBI has the issue firmly in its sights (it has taken steps to recapitalise PSUs, while encouraging indebted corporates to manage their obligations more actively). Elsewhere, the managers say that progress on a unified GST remains crucial, both for Mr Modi’s credibility and India’s economic evolution. They say that there appears to be growing optimism that political differences will be put aside in a bid to advance the legislative agenda this year and that, if this were to happen, this would augur well for Indian equities.
New India benefits from resilient holdings : NII