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Ashoka India benefits from India’s resurgence

Ashoka India benefits from India’s resurgence – Over the year ended 30 June 2021, Ashoka India Equity Investment Trust returned 52.6% in NAV terms, outperforming its benchmark index, the MSCI India IMI, which returned 45.2%. The share price stood at 162.5p at the year end, a 2.3% premium to NAV. As at 28 September 2021, the closing share price was 191.0p. 18.3m new shares were issued during the year under review. Against that, in the annual redemption event, 5,386,826 shares were submitted for redemption.

Manager gets a pay day

No annual management fee has been levied since inception. Instead, the investment manager (Acorn Asset Management Ltd) is paid solely by means of a performance fee, based on the level of performance relative to the benchmark index over a three-year period. The initial period ended on 30 June 2021 with an NAV return of 62.1% compared to 34.2% from the index (in sterling). As a result, a performance fee equal to 30% of this outperformance (capped at 12% of NAV) is due to the investment manager soon after the 2021-year financial statements have been audited. This fee is expected to amount to £7.9m and will be paid in the form of new shares in the company, at least 50% of which will be locked-in over a three-year period from the date of issue, thus continuing to align the interests of the investment manager with those of all shareholders. These new ordinary shares will be issued at the prevailing net asset value on the date of issue.

Extract from the manager’s report

“Contributors
Coforge is a fast-growing, mid-sized IT services company with approximately $650 million in annual revenues and is present across three major verticals: travel & transportation, insurance & banking and financial services. These collectively account for 70% of revenues. It has a niche positioning in both travel as well as insurance verticals. The company underwent a management change around three years ago and under the new leadership has consistently demonstrated strong improvement across all Key Performance Indicators (KPIs) including order intake, the number of million-dollar clients, large deal wins, digital business growth and client diversification. The stock price outperformed during the year due to continued robust performance and a strong growth outlook.

Infosys is India’s second largest IT services company with $13 billion in revenues, a strong global presence, and a high-quality customer portfolio. It operates across seven major verticals: (a) banking, financial services, and insurance, (b) retail & Consumer Packaged Goods (CPG), (c) communications, (d) energy and utilities, (e) manufacturing, (f) hi-tech, and (g) life sciences. Since Salil Parekh’s appointment as CEO in January 2018, Infosys has made strong investments in building digital capacities, onshore talent acquisition and increased sales and marketing efforts. The results of these initiatives are showing up in strong deal wins translating into industry leading growth with improving margins. The stock price outperformed on the back of several multi-billion-dollar deal wins over the past few quarters and continued strength in the overall demand environment.

ICICI Bank is the second largest private sector bank in India with a strong retail deposit franchise, leading CASA (Current and Savings accounts) metrics and one of the lowest cost of funds across private banks. Post a leadership change in October 2018, the bank has strengthened credit underwriting and risk functions, thereby creating a foundation for industry leading performance over the coming years. The company’s asset quality has remained resilient during the two waves of COVID-19 with only 1.16% of Net Non-Performing Assets (NPAs) as of Q1 of the financial year ending 2022. Given the provision coverage on existing NPAs of 78% and contingent provisions of 0.9% of advances available to absorb any fresh shocks, ICICI Bank is well poised to gain market-share and deliver mid-teens Return on Equity over the medium term. The strong business performance has also resulted in a commensurately strong stock performance.

Detractors
Bharti Airtel is India’s second largest telecom operator providing wireless and fixed line broadband services. The Indian telecom industry is worth approximately $25 billion in revenues and has consolidated into a three-player market with Reliance Jio, Bharti Airtel and Vodafone-Idea controlling 93% of the market after a period of unprecedented disruption and intense price competition. Bharti Airtel has demonstrated superior execution on the back of its high-quality customer base and continues to gain market share from Vodafone Idea which is struggling with a highly leveraged balance sheet. Whilst we broadly expect price discipline to be observed by the industry over time, we are likely to see intermittent instances of price aggression along the way which we anticipate to be unsettling for competitors. This was seen in September 2020 when Reliance Jio, the market leader introduced a slightly aggressive post-paid plan causing Bharti’s stock price to underperform. We have exited this position.

Nestle India is India’s largest food products company. With household brands like Maggi, KitKat, Nescafe, Cerelac and Nan in its portfolio, it is a market leader in most of the categories that it operates in. Under the leadership of its new CEO, Suresh Narayanan, it has significantly increased focus on volume growth driven by new product development and distribution. It has launched more than 40 products in various categories over the past two years and is following a cluster-based approach to enhance distribution. We expect Nestle to continue to deliver strong performance led by increasing penetration and new product introductions. Given the defensive nature of the business, the stock often tends to lag in a sharply rising market. We remain invested in the business.

Indigo Paints is one of the fastest growing companies in the decorative paints industry with a strong position in certain niche product segments. Its revenue has grown by 39% annually over the last decade as the company has expanded its distribution and tinting machines network. Indigo has created a portfolio of differentiated products such as floor coatings which command leadership positions in terms of brand recall and market share in several states across the country. The company derives approximately 30% of its revenue from these products which have higher profitability compared to peers. The stock underperformed, due to concerns around higher raw material prices impacting profitability in the near term. We remain invested.”

AIE : Ashoka India benefits from India’s resurgence

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