Investors are coming round to a ‘resilient India’ says India Capital Growth manager – India Capital Growth (IGC) has published its final results for the year to 31 December 2021. During this time, it reported an NAV increase of 37.9% and a share price increased of 42.7%.
However, the company’s NAV underperformed its benchmark, the BSE MidCap Total Return Index, which rose by 39.7% over the same period. The underperformance can be explained by the recognition of the potential Capital Gains tax liability in the calculation of the NAV, equivalent to reducing the NAV by approximately 2.4%. Mid and small cap stocks outperformed large cap companies over the period.
The manager said one explanation for the performance is the tendency of equity markets to mean revert. Because India fared poorly in both 2018 and 2019, a combination of poor sentiment, oversold markets, and global central bank infused liquidity was enough to cause equities to surprise on the upside.
A more encouraging explanation is that investors are coming round to the view that India’s macro economy is demonstrating more resilience in the face of global market volatility, and this is feeding into corporate and consumer confidence. The recent performance has favoured midcap companies which would imply that, although easy liquidity has supported the market generally, investors in India are anticipating the long-awaited economic recovery.
Redemption facility
31 December 2021 saw the first redemption point at which shareholders in IGC could request redemption of part or all of their shareholding at an exit discount of 6%. 15.6m shares were redeemed, representing 13.9% of shares in the company.
The second redemption point will be on 31 December 2023. The board has announced that the exit discount at this redemption point will be no more than 3%.
Manager’s outlook
As I write this, the Russian invasion of Ukraine poses a risk to the continuation of India’s economic recovery. While India’s direct trade exposure to Russia is less than 1% of exports and 2% of imports, India remains vulnerable to rising energy prices. India imports over 80% of its oil. If current oil prices of US$120 a barrel are sustained, India’s oil import bill in a year could rise by almost US$60bn from US$130bn estimate for the financial year ended March 2022. Prices of other key imports like coal, fertilizers, sunflower oil etc. have also seen a rise and could add a further US$35bn to the import bill. This implies that the current account deficit could increase to 2.7-3% of GDP and India’s balance of payments could turn from positive to negative. Hence the biggest risk is on the currency. We draw comfort from the fact that unlike 2011-12, which was the last time oil was above US$100 a barrel, the economy now is far more resilient. India has amassed record foreign exchange reserves of over US$630bn, inflation is at 5.5% (vs 10% in 2011-12), the current account deficit is 1.5% (vs 4.5% in 2011-12) and the information technology services sector alone has reached scale with annual exports of over US$180bn, well above India’s oil imports.
The above crisis however comes at a time when commodity prices were already at historical highs and many companies had resorted to raising their prices to protect margins. We believe companies would find it difficult to pass on further increases without impacting demand. This is relevant not just for India but globally as well. While it is still too early to factor in the impact on demand or margins, the longer the Ukraine crisis lasts, the greater the risk to earnings downgrades. The recent market correction does however factor in some potential cuts to earnings. We are less concerned about stress on the balance sheets of corporate India as most companies have been deleveraging over recent years. Even the banking system is well capitalized with banks sitting on surplus liquidity.
To end on a positive note, assembly elections in five states were just completed and the Modi Government emerged victorious in four of the five states. This included Uttar Pradesh, India’s largest state with a population of over 200m people. This is a positive as it reaffirms Prime Minister Modi’s popularity, ensures continuity in government policies and provides greater macroeconomic stability. It also puts the Modi government on a strong footing ahead of the general elections in 2024.
IGC : Investors are coming round to a ‘resilient India’ says India Capital Growth manager