New India has announced its interim results for the six months ended 30 September 2016. During the period, the trust’s NAV per share increased by 21.5% to 439.98p while the Ordinary share price also gained by 21.5% to reach 380.75p. By comparison, the trust says that its benchmark MSCI India Index increased by 21.6% and so the trust has performed in line with its benchmark.
Looking at performance in more detail, the manager says that Positive stock selection in health care was the biggest contributor to relative performance. This was led by Piramal Enterprises, which rallied after announcing its intention to split its core segments – financial services and pharmaceutical, into two listed companies. The manager says that this is expected to unlock value and unwind the conglomerate’s discount by separating its distinct and unrelated businesses. Meanwhile, the manager says that Biocon’s shares rose in anticipation of the company realising value from filing four new generic drugs in the US or EU within the next year.
The manager reports that the IT sector as a whole was weak on the back of softening demand from developed-market clients and that, reflecting this, the underweight to Infosys aided relative performance. The manager says that investors were disappointed with the company’s results and its forecast for the year ahead. Infosys’ management attributed this to unanticipated headwinds in discretionary spending on consulting services, package implementations and slower project ramp-ups in large deals.
At the stock level, the manager says that the company’s materials holdings, such as Kansai Nerolac Paints and Grasim Industries, lifted relative performance. Reportedly, these companies were beneficiaries of benign raw material costs that helped boost their bottom-lines.
The manager says that, among the detractors, the underweight to the consumer discretionary sector hurt performance. Specifically, not holding Maruti Suzuki and Tata Motors proved costly, as they were buoyed by expectations of an improvement in rural demand. However, the manager advises that it prefers what it considers to be the more resilient and less capital-intensive two-wheeler business, embodied by Hero MotoCorp.
The manager says that, among industrials, power and automation equipment manufacturer ABB India detracted. The manager comments that its earnings have yet to sprout green shoots and the outlook for its order-book has not improved. On a positive note, its bottom-line was boosted by lower raw material and financing costs. Elsewhere, drugmakers such as GlaxoSmithKline Pharmaceuticals were weighed down by regulatory challenges and pricing pressures in the key US market, as well as drug price controls in India.
The manager says that, while concerns over credit risk continued to dog state-owned financials, the State Bank of India’s bad debt problem was less dire than the market anticipated, so not holding the lender detracted from performance. The manager advises that it continues to favour private-sector banks with healthy loan growth and good asset quality.
In terms of portfoliom activity, the portfolio’s exposure to the IT software sector was increased as the manager initiated a position in Cognizant Technology Solutions. Against this, Linde India was sold following a solid rally, as was Tata Power, which continued to face regulatory uncertainties and made acquisitions despite its weak balance sheet. Jammu & Kashmir Bank was divested given the deterioration in its asset quality and balance sheet. The manager switched partially from ICICI Bank to Kotak Mahindra Bank, as this appears appears better-placed to gain from a domestic economic recovery. A partial switch was also made from Bharti Airtel to Bharti Infratel, which the manager comments upon as appearing to be more poised to benefit from increased competition from new players entering the telecommunications sector. The manager says that the position in Jyothy Laboratories continued to be built up, on account of its solid portfolio of household products, potential for nationwide expansion and the ability of management to follow through on its plans.
In terms of outlook, the manager says that Indian equities continue to face headwinds and that a possible Fed interest rate hike before the end of the year could unsettle markets. Furthermore, while stabilising commodity prices have helped keep costs low, questions remain over where the oil price is headed and how that could adversely impact the nation, a net importer. The manager thinks that unrest and geopolitical tensions in the subcontinent could also play a role. However, the manager says that the ground-breaking GST victory and a slew of other reforms, including the recent demonetisation of certain Rupee bank notes, have combined with sustained macroeconomic growth to reignite hopes that Mr Modi can deliver even more. However, the manager says that this has not quite filtered down to the stock level in terms of a broad-based earnings recovery, although company valuations remain relatively high. A burgeoning middle class and potential for growth in rural areas continue to offer compelling reasons for long-term investment in India in, the managers view, and the manager thinks that moments of volatility could provide opportunities to add to quality companies that can benefit the portfolio in the long term.
New India grows 21.5% in half year, in line with benchmark : NII