abrdn New India post sharp turnaround in performance but lags benchmark

abrdn New India Investment Trust (ANII) has published its annual results for the year ended 31 March 2024, during which it provided NAV and share price total returns of 27.8% and 27.3% respectively, underperforming its MSCI India Index, which returned 34.4% (all in sterling in total return terms). This performance is a sharp turnaround from the previous 12 months, although the discount to NAV of 20.4% was almost unchanged from that at the end of March 2023.

ANII’s chairman, Michael Hughes, comments that “India’s impressive performance [has] continued to defy a global environment rife with volatility. Since then, the country’s upward trajectory has persisted – its stock market continues to be one of the best performing markets while the economy is the fastest-growing among its peers”. He says that ANII’s manager is working hard to improve performance both in absolute and relative terms and is confident that the underlying fundamentals of the portfolio remain sound, and our holdings continue to report healthy earnings progression.

Hughes adds that, Looking at ANII’s performance during the year in more detail, the largest positive contribution to relative performance came from property. The portfolio has a large exposure to this sector, compared to the Benchmark, as India is undergoing a long overdue recovery in residential property sales, and the long-term prospects remain bright. He says that the manager’s decision to proactively pivot the portfolio towards industrial names and likely beneficiaries of large-scale public spending is starting to pay off.

Hughes says that ANII’s Board has embarked on a number of initiatives over the year ended. Specifically, it is:

• encouraging the Manager to more proactively consider mid-cap stocks representing a greater proportion of the portfolio, while still preserving its investment philosophy with its focus on quality and growth characteristics. In response, the Board has noted that the Manager has extended its analyst coverage, with deeper knowledge of the mid-cap sector;
• supporting the Manager in taking more active positions in stocks in which it has the most conviction; and
• at the AGM in September 2023, putting forward a resolution to permit the Company to invest up to 10% of net assets into pre-IPO investments, which was overwhelmingly supported and, as a result, the Manager will pursue opportunities where feasible.

Alongside these developments, the Board initiated a higher level of share buy-backs, and sought the more regular update of the Company’s website (www.abrdnnewindia.co.uk), featuring additional webcasts and articles on India as the nation holds a general election involving over 1 billion voters.

Manager change – Kristy Fong stepping down after nearly 20 years

After involvement with ANII for nearly 20 years, Kristy Fong is stepping down as co-investment manager in September 2024. James Thom will become the lead investment manager, assisted by Rita Tahilramani.

Update on progress towards the conditional tender offer in 2027

In March 2022, ANII’s Board announced the introduction of a five-yearly performance-related conditional tender offer. At that time, the Board was concerned about the relative underperformance of the Company’s NAV, as compared to its Benchmark. Following discussions with the investment manager, the Board decided that, should ANII’s NAV total return underperform its benchmark over the five-year period from 1 April 2022, then shareholders should be offered the opportunity to realise up to 25 per cent of their investment for cash at a level close to NAV. For these purposes, ANII’s NAV per share is adjusted for Indian capital gains tax to enable a like-for-like comparison with the benchmark. Over the first two years of the measurement period from 1 April 2022 to 31 March 2024, the Adjusted NAV total return was 20.7% versus the Benchmark’s total return of 26.4%.

Discount and share buybacks

Over the year ended 31 March 2024, ANII bought back into treasury 3,702,011 (2023 – 2,127,206) Ordinary shares, representing 6.6% (2023 – 3.7%) of the issued share capital (excluding treasury shares) at the start of the year, a considerable step up in buyback activity. At 31 March 2024, there were 52,107,910 (2023 – 55,809,921) shares in issue with voting rights and an additional 6,962,230 (2023 – 3,260,219) shares held in treasury. Between the year end and 13 June 2024, a further 564,198 shares were bought back into treasury resulting in 51,543,712 shares in issue with voting shares and 7,526,428 shares held in treasury. ANII’s Board believes that a combination of stronger long-term investment performance and effective marketing should increase demand for the trust’s shares and reduce the discount to NAV at which they trade, over time.

Gearing

As at 31 March 2024, £26m (2023 – £30m) had been drawn from the £30m bank loan provided by Royal Bank of Scotland International, which resulted in net gearing of 4.1% (2023 – 5.8%). During the year, this gearing had a positive impact on returns, though the Board and Manager are conscious of the increased interest cost of gearing, so keep the level of gearing under regular review.

Impact of Indian Capital Gains Tax

ANII, along with other investment vehicles, is subject to both short and long term capital gains taxes in India on the growth in value of its investment portfolio, which become payable when underlying investments are sold and profits crystallised. Where investments are valued at a profit, but not yet sold, ANII must accrue for the potential capital gains tax payable, which amounted to £19.4m (2023 – £11.1m) at 31 March 2024, equivalent to a reduction in the NAV per share of 37.2p or 4.5% at 31 March 2024 (2023 – 20.0p or 3.1%).

Investment managers’ comments – market review

“As the Chairman describes in his Statement, the Indian market had a strong run throughout most of the year, underpinned by a robust domestic economy and an enviable growth trajectory. Retail inflation has remained steady at just over 5%, while the Reserve Bank of India has not increased interest rates since February 2023. The estimated GDP growth rate for the full financial year was projected at 7.6%, surpassing the previous year’s figure of 7%, leading to India holding to its position as the world’s fastest-growing major economy. We did see some pullback in the market this year, particularly in the small-and-mid (“SMID”) cap space. After outperforming Indian large-caps last year, SMID companies corrected in March 2024 when the Indian securities regulator increased scrutiny towards domestic mutual funds due to rising valuations. We had been very selective in adding SMID names to the portfolio, preferring companies with good earnings visibility and a track record of delivering on growth.

“At the time of writing, India’s 2024 general election has just concluded, and the outcome came as a big surprise to the market. Polls had predicted that Prime Minister Narendra Modi and his party would comfortably win enough seats in the lower house of parliament to form a government on their own. Instead, Modi’s Bharatiya Janata Party (BJP) failed to secure a majority. This has forced Modi and the BJP into a coalition government for the first time in his career. Modi’s bargaining power within this alliance is likely to be reduced, with a possibility of ministries reshuffling and some of them being given to the non-BJP leaders. As a result, we will need to keep a close watch on Cabinet formation and capital allocation in the FY25 budget.

“Thinking about the implications for policymaking, we view BJP’s broad agenda around infrastructure, manufacturing, and technology is likely to continue, and would create structural tailwinds for the economy. New big bang reforms, however, are unlikely to come from a coalition government. Instead, we could see measures favouring populist agendas take precedence whilst there could be some moderation in capital expenditure. Job creation and tackling the rural economy could also take the spotlight.

“The Company’s quality focus and positioning in several defensive sectors such as IT Services, Consumer Staples, and, to some extent, Banking and Insurance, should provide resilience to the portfolio through the current market turbulence. Our conviction in our India holdings remains strong, re-enforced by recent trips and meetings with company management teams. Valuation dips could present buying opportunities.

Investment managers’ comments – performance review

“The strongest returns came from the holdings in property as well as from infrastructure and capital expenditure (capex) beneficiaries in utilities and industrials sectors. Our consumer, financials, and energy stocks, however, lagged the market’s rally. Real estate was the biggest performance driver, with our exposures benefitting from structural trends as well as the SMID rally seen throughout most of 2023. Property developers Godrej Properties (see the case study below) and Prestige Estates were the top stock contributors, reporting strong pre-sales numbers for their new housing projects. India is undergoing a long overdue recovery in residential property sales and the future prospects for the overall sector remain bright.

“We were pleased to see that our repositioning towards industrial names and capex proxies has paid off. India has ramped up public capex by building more roads, railways, ports and similar projects to create additional jobs and revive private capex. Our holdings that benefited from this step-up in capital spending include ABB India as well as Power Grid Corporation of India. Power Grid has raised its capex guidance as its development pipeline and earnings visibility remain robust. Meanwhile, our telco exposure in Bharti Airtel (see the case study below) did well amid ongoing industry consolidation, and on expectations of a new tariff hike after the elections.

“Some of our IPO names that were depressed in the previous year, due to the growth-to-value rotation in the market, have started to demonstrate positive performance. This includes affordable housing company Aptus Value Housing Finance and online insurance platform, PB Fintech.

“Looking at where the Company has fallen short, HDFC Bank and Hindustan Unilever have both disappointed in growth and, therefore, in relative share price performance. HDFC Bank will now take longer to deliver integration cost savings following its merger with mortgage lender HDFC, in a tighter liquidity environment. A sluggish rural economy has acted as a brake on Hindustan Unilever’s growth. While we continue to believe in the medium-term investment theses for both stocks, we have partially cut these holdings to release funds for several of our new ideas discussed below.

“In the energy sector, our holding in Aegis Logistics did well but trailed its peers – mostly public sector companies – which we tend to avoid owning in the portfolio. Index heavyweight Reliance Industries lagged in 2023 but saw a recovery in its share price in 2024. We do not hold the company due to reservations around capital allocation and governance standards.

“Finally, within consumer discretionary, our auto holdings performed well but underperformed some of their peers. Not holding online delivery company Zomato also affected relative performance. While we are aware that we are lightly exposed here, this sector is seeing increasingly stretched valuations, and we believe it is necessary to tread with caution.

“Overall, the underlying fundamentals of our portfolio remain sound, and our companies continue to report healthy earnings growth, mostly in line with expectations.”

Investment managers’ comments – portfolio activity

“During the year, we actively repositioned the portfolio to maximise potential returns. Key changes included scaling up the exposure to investment themes that we found attractive, provided we could find stocks that met our quality criteria from a bottom-up perspective in these sectors. These structurally attractive themes include: premiumisation, property upcycle, and infrastructure and capex beneficiaries. We also added some high-quality names based on stock-specific factors that were largely independent of more top-down themes.

“Within consumer, we introduced a new SMID-cap addition in the automotive sector, Uno Minda, which provides auto components to four-wheeler and two-wheeler OEMs. In real estate, we added Phoenix Mills, which operates high quality shopping malls in top-tier and state capital cities with a good pipeline of new assets expected over the next few years. It is also a premium consumption play as India’s disposable income slowly tracks higher alongside growth.

“In Industrials, we introduced Siemens India, the Indian arm of the German multi-national, as well as a SMID-cap name, Apar Industries. We also added Havells India, a proxy to the electrical and consumer durable sector, and building material company Pidilite, an indirect beneficiary of the housing cycle and home improvement trend. In Software & Services, we scaled back our position given the sector’s vulnerability to a slow-down in the core US market and a subsequent contraction in IT spend. However, we have also taken advantage of the price falls across the sector and added a new mid-cap name, Coforge, which provides niche IT services with deep domain expertise.

“While financials remains our largest portfolio weight by sector, we broadened our mix of stock holdings. We added to NBFCs (non-bank finance companies) by initiating Cholamandalam Investment and Finance that has a long growth runway and has operating levers to mitigate against rate headwinds.  We also introduced KFin Technologies, a fast-growing player in the Mutual fund Registrar and Transfer Agency duopoly, benefitting from structural growth trends such as wealth accumulation in India. These were funded by reducing our banking exposure, primarily with the exit of Kotak Mahindra Bank.

“Lastly, we also exited lower conviction holdings Asian Paints and Renew Energy Global to fund some of the new ideas.”

Investment managers’ comments – outlook

“India is the world’s fastest-growing major economy, backed by a resilient macro backdrop that includes a real estate boom, strong consumer sentiment in urban areas, and a robust infrastructure capex cycle.

“The growth story is underpinned largely by supportive policies from the central government as well as a decade of painful, but necessary economic reforms. The groundwork laid by these sweeping reforms has put India on a positive economic trajectory. We are also seeing early signs of a private capex revival. This can potentially continue to sustain both economic momentum and corporate earnings growth.

“India still faces some near-term risks, most of which are external, including potentially higher global energy prices and a slowdown in the world economy. As a net oil importer, recent developments in the Middle East remain a potential source of concern as any escalation will push oil prices higher. As the Chairman noted earlier, valuation is also a perpetual risk – given its recent outperformance, India has become a consensus trade, with valuations becoming stretched, especially in small and mid-caps. The key to taking advantage of this market’s promise is bottom-up stock picking that is backed by fundamental research, which aligns well with how we invest.

“The Company’s downside is well-protected given our quality focus, and our defensive holdings are in a good position in case of profit taking.  Furthermore, any correction in the market would be an opportunity to add to the holdings. The consistency of earnings growth of the portfolio remains healthy and individual company fundamentals, such as pricing power, strong balance sheets and the ability to sustain margins, remain solid.”