abrdn New India has published results covering the 12 months ended 31 March 2023. Over the period, the NAV return was -8.0% and the return to shareholders was -8.9%. Both are a little worse than the -6.0% return delivered by the MSCI India Index.
The chairman notes that one of the most significant drivers of positive relative performance was not holding any of the Adani entities as a US short-seller report, accusing the Adani Group of stock manipulation and accounting fraud, preceded sharp share price falls in Adani-related companies.
On the negative side, the Indian stockmarket witnessed weaker share price performance from sectors that were more sensitive to interest rates, among them the quality growth internet stocks that were added to the portfolio in 2021. Real estate stocks were also impacted by rising rates.
In a lament common to many investors that focus on quality, the chairman says: “In a period of higher interest rates and inflation, as witnessed during the year, one would typically expect quality stocks to be more resilient. However, with global macro factors such as geopolitical risks shaking up markets these fundamentals have been largely ignored. Growth stocks favoured by the investment manager were disproportionately sold off and value stocks rose sharply for much of 2022.” However, he also notes that quality stocks had a better time in the final quarter of the year under review.
Over the year, the company bought back into treasury 2,127,206 shares at a cost of £11.8m. There is a reminder in the chairman’s statement that the trust will offer a 25% tender offer if it underperforms over the five-year period ended 31 March 2027. Clearly, it hasn’t got off to a good start. [Our guess is that continued underperformance over coming years would mean pressure on the board to cut the length of this measurement period and bring forward the tender date.]
The directors are proposing an amendment to the investment policy (subject to Financial Conduct Authority and shareholder approval) to give the company the flexibility to invest over time in unquoted Indian companies which are close to coming to market through an Initial Public Offering (IPO). Many such companies tend to offer pre-IPO investment rounds in the months leading up to a planned IPO.
Such unquoted companies would still have to meet the manager’s strict quality criteria, have clear and understandable business models and strong management teams.
The board and the manager believe that the proposed change would provide the company with better access to more opportunities at more favourable prices and with the opportunity to perform deeper due diligence on the relevant companies. These opportunities would also take advantage of the closed ended nature of the company. Investments would only be made as and when suitable opportunities arise.
Investment in unquoted Indian investments would be limited to 10% of the company’s net asset value, in aggregate, and calculated at the time of investment.
With effect from 1 April 2023, the investment management fee is calculated at an annual rate of 0.8% (formerly 0.85%) in respect of the first £300m (formerly £350m) of the company’s net assets and an annual rate of 0.6% (formerly 0.7%) in respect of net assets in excess of £300m (formerly £350m).
Extracts from the manager’s report
Looking at the portfolio’s performance over the Year, it is perhaps best explained in two distinct periods. Between April and December 2022, the Company’s performance fell sharply behind the Benchmark. However, between January and March 2023 – performance was much improved and recouped some of the earlier losses.
Over the first period, the key reasons for the under-performance against the Benchmark were: not holding any of the Adani group of companies (the “Adani Group”) in the portfolio, negative stock selection in Azure Power Global and Piramal Enterprises, the poor returns from the IT services stocks, and not holding Mahindra & Mahindra in the early part of the review period. We discussed these reasons in greater detail in the Half-Yearly Report for the six months ended 30 September 2022 (available from www.abrdnnewindia.co.uk) and while we had taken some profits from our IT services holdings, our overall overweight exposure to the sector detracted from performance during the early part of the Year.
For the second period, as the final three months of the Year, the recovery in performance was mainly due to the unravelling of the Adani Group, which started in January 2023 after the publication of a highly critical report by a US short-seller; a key event which your Chairman has made a reference to also. We believe in investing in businesses that are backed by reputable promoter groups with a track record of delivering value to all shareholders. We continue to view the Adani Group as lower quality stocks given their weak financial track records, highly over-leveraged balance sheets and major ESG concerns, which make them risky bets in our view, which we have not been prepared to expose the portfolio to. We have always been clear about our reservations over the transparency and accounting practices of the Adani Group and the dramatic share-price collapse is a vindication of our rigorous investment process that filters out low-quality companies from the outset.
The relative contribution from the financials sector also turned positive. The share price of PB Fintech, which operates the online insurance platform Policybazaar, staged a strong recovery after its results showed that it was on track to turn profitable – in terms of its earnings before interest, taxation, depreciation, and amortisation (EBITDA) – in the next financial year. It was one of the high-quality growth stocks in the portfolio whose share price was depressed heavily in 2022 due to the rotation away from growth to value, despite displaying healthy fundamental characteristics.
Our holdings in core banks such as ICICI Bank and HDFC Bank also held up better than other lenders as the banking sector was weighed down by concerns over the collective exposure to Adani loans. In addition, HDFC Bank’s upcoming merger with HDFC appears to remain on track, which we viewed as positive for the stock, and our exposure to it.
These holdings were also buoyed by better credit growth, higher interest rates and good asset quality.
Our industrial capex and infrastructure-related holdings also contributed to better relative performance. ABB India’s strong portfolio of products and services benefited from the recovering capex cycle. The company also plans to invest US$121 million (approximately £97 million) over the next five years to expand its capacity to meet growing demand. Power Grid Corporation of India, which benefits from the country’s need to invest in power infrastructure, outperformed after delivering good results. UltraTech Cement performed well, as the company ramped up capacity, driven by strong demand from infrastructure and housing and rising private sector capex.
Aegis Logistics, in the energy sector, remains a strong performer, which is well-positioned to capitalise on continued growth in demand for Liquid Petroleum Gas in India with its key terminal infrastructure in strategic locations along the country’s coastline.
On the other hand, our e-commerce, IT services and real estate sectors remained under pressure for the latter period.
In consumer discretionary, e-commerce company Nykaa continued to experience a falling share price despite delivering robust growth. However, we were concerned about the series of management changes the company had been through and have since sold the holding. Crompton Greaves Consumer Electricals fell short of earnings expectations due to weaker consumer durables demand amid high inflation – we have also reduced the holding as the macro backdrop remains challenging for the company.
Elsewhere, our real estate holdings, namely Godrej Properties, was held back by concerns that rising mortgage rates will affect demand. We have not seen any evidence of this as the company reported robust growth in residential home sales in the major markets. We maintain our conviction in the stock as Godrej remains in a good position, with a robust balance sheet, ahead of both the structural market consolidation and the industry upcycle, that we are anticipating.
IT services remained weak on global recessionary fears. As we are concerned that valuations in this sector do not reflect the slowdown in technology spending, we have continued to reduce the portfolio’s exposure to the sector by selling Mphasis.
On the ESG front, we continued to engage with companies on various issues. Following our discussions with Affle India (corporate governance), Godrej Properties (green strategy) and UltraTech Cement (decarbonisation efforts), we made the first post-Covid trip to India in February 2023 which helped our engagement and understanding of the ESG issues in the portfolio.
ANII : abrdn New India seeks exposure to pre-IPO opportunities