Aberdeen New India flat result belies turbulent year – For the year ended 31 March 2018, Aberdeen New India’s NAV rose by 0.4% to 490.0p as compared to the benchmark MSCI India Index which fell by 1.7% (both in Sterling terms). However, the share price fell by 3.5% to 426.0p reflecting a widening of the discount to NAV from 9.5% on 31 March 2017 to 13.0% on 31 March 2018.
Over the year Indian equities in local currency terms remained largely flat due to a weaker-than-expected recovery in corporate earnings, while rising oil prices also proved a hindrance for a country which is a net oil importer. Although India tends to be relatively insulated from world events, several government-led initiatives played a major role in shaping sentiment, including the implementation of a nationwide Goods and Services Tax (“GST”), as well as capital infusions for debt-ridden state-owned banks. While an appreciating pound dampened absolute returns for UK investors, the underlying portfolio marginally outperformed the benchmark, driven by good stock selection.
Extract from the manager’s report
“Health care was the weakest sector by far in India during the year under review, yet the portfolio’s stock selection boosted relative performance. At the stock level, Piramal Enterprises was a key contributor. While it remains categorised under health care in the benchmark index, the stock was buoyed by investor confidence in its financial division. It raised capital to fund the growth opportunity it sees in consumer financing and to support its bolt-on acquisition strategy in pharmaceuticals. The company consolidated its real estate and non-real estate financing arms as well as its new housing finance business under one entity, Piramal Capital. Investors were optimistic about the possibility of their newly formed subsidiary being spun off in the future to unlock value. Biosimilars business Biocon also outperformed, after its results exceeded expectations and it achieved US regulatory approval for a new cancer treatment – biosimilars are drugs designed with similar properties to those already licensed.
Our holdings in financials also aided performance, and supported our conviction that private sector banks are in better shape than their state-run counterparts. The lack of exposure to State Bank of India was positive, as the government lender grappled with tighter regulations and suffered from waning public confidence in state-owned banks in the wake of the Punjab National Bank fraud. Although the fall-out from the scandal was negative for the sector, the portfolio’s better quality private lenders were resilient, especially those not exposed to corporate loans. Gujarat-focused home loan provider Gruh Finance and consumer and retail lender HDFC Bank, both subsidiaries of Housing Development Finance Corp, were among the Company’s best performing stocks over the year.
Among information technology stocks, mid-cap holding MphasiS was buoyed by good results and investor confidence in its plans for expansion through acquisitions. The stock has benefited under the ownership of Blackstone, with better access to potential clients and contract opportunities. Most recently, it won a contract from CitiMortgage for its digital mortgage platform. Tata Consultancy Services (TCS) and Infosys also did well on the back of better earnings and a positive outlook, with the underweight to Infosys dampening returns slightly.
Materials holding Kansai Nerolac Paints was another key contributor, having benefited from low input costs, good margins and a growth recovery post demonetisation. It continued to gain market share in both the auto paints and decorative segments.
The lack of exposure to Reliance Industries, continued to be a drag on performance. The index heavyweight rose alongside the oil price, and as its new telecoms business gained ground. Although the market expected that the Jio venture would eventually become more rational in its pricing policy, that has not materialised. We remain sceptical of the company’s aggressive capital allocation decisions that are not focused on returns, and are not always shareholder friendly. In contrast, the portfolio’s sole energy holding, Aegis Logistics, is a high quality stock with a robust balance sheet that has contributed to returns since its initiation into the portfolio.
The consumer discretionary sector was the biggest detractor. Our holding in Bosch was hampered by soft earnings, but we remain confident that the company, with its technological leadership and cost efficiencies, is well placed to benefit from a recovery in automotive demand.
Elsewhere, ITC fell on the back of cigarette tax hikes following the implementation of GST. It raised product prices in response and later reported better quarterly results.”
ANII : Aberdeen New India flat result belies turbulent year