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India Capital Growth serves up great absolute but poor relative returns

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India Capital Growth Fund reports NAV growth of 28.6% and share price growth of 34.1% for 2023. However, the benchmark S&P BSE Midcap Total Return Index rose by 38.4%

The share price discount to NAV narrowed over the year to just over 3.9% at the year end. The board intends to continue to repurchase shares when the discount is inappropriately wide, in normal market conditions.

After investors redeemed 15.16m shares or 15.7% of the company at end September 2023, the company bought back just 150,000 and reissued 5.8m shares from treasury.

Extracts from the manager’s report

2023 was a year when every sector contributed positively to the performance of the portfolio. This reflects the broad-based nature of the economic recovery. For ICGF, the main contributors to positive performance were healthcare (underweight), IT (overweight), Consumer Staples (overweight), materials (overweight) and Industrials (Underweight).

Even at the stock level, the performance was driven by companies across different sectors. Neuland Labs (up 217%), a pharmaceuticals company, Ramkrishna Forgings (up 176%), an auto ancillary and IDFC First Bank (up 51%) were the top contributors. Each company delivered robust earnings growth, which also drove a rerating. Elsewhere, Jyothy Labs (up 134%) was amongst the best performing consumer staples companies as it continued to deliver double digit revenue growth in a weak consumer environment. Persistent Systems (up 91%), an information technology company, also outperformed the sector both on revenue growth and margin improvement. In industrials, Skipper (up 81%) saw a rise in order book as the capex cycle in power sector picked up pace and it also won new business in developed economies. Finolex Cables (up 95%) benefitted from the housing led demand for wires. Even in textiles, Welspun India rose (up 87%) as it gained market share in the US markets and also saw margins normalise with raw material prices easing. Dixon Technologies (Consumer Discretionary) rose (up 68%) and Sona BLW (Auto Ancillary) rose (up 54%), once again led by strong performance and continued order wins.

Adverse stock performance was led by the consumer discretionary companies, all of which were impacted due to a slowdown in consumer demand because of high inflation. This was led by Bajaj Electricals (down 9%) and Vedant Fashions (down 5%). In Financials, City Union Bank declined (down 17%) due to weaker credit growth compared to peers.

At an index level, the biggest detractor was our absence in public sector companies (where the government is the majority owner), specifically in financials and utilities. This includes Power Finance Corporation (up 239%) and Rural Electrification Corporation (up 254%,) both lenders to state utilities. Also, Trent (Retail) which rose 126% detracted from our performance.

IGC : India Capital Growth serves up great absolute but poor relative returns

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