India Capital Growth Investment companies | Update | 17 June 2021 Lessons learnt Sector India Ticker IGC LN Though India’s second coronavirus wave – which started in March 2021 Base currency GBP and saw as many as 414,000 recorded daily cases as recently as 6 May Price 108.50p – has been described as one of the worst in the world, Gaurav Narain, NAV 122.98p India Capital Growth’s (IGC’s) investment adviser, believes the peak in infections has now passed. The number of new daily cases appears to Premium/(discount) (11.8%) be falling and the country’s vaccine rollout is ramping up after a Yield Nil temporary slowdown following production constraints. Gaurav also believes India’s government learnt its lesson from the first outbreak and its decision to allow businesses to continue to operate this time around has helped the economy to recover faster and emerge stronger. IGC’s shares are now trading at discount levels which are more akin to those prior to the onset of the pandemic. Mid- and small-cap listed investments in India IGC’s investment objective is to provide long-term capital appreciation by investing (directly or indirectly) in companies based in India. The investment policy permits the company to make investments in a range of Indian equity securities and Indian The fruits of the change in equity-linked securities. The company's investments are investment process are clearly predominantly in listed mid- and-small-cap Indian companies. visible in IGC’s performance over the last 12 months. India’s economy has remained open, allowing it to recover faster and emerge stronger. NB: Marten & Co was paid to produce this note on India Capital Growth Fund Limited and it is for information purposes only. It is not intended to encourage the reader to deal in the security or securities mentioned in this report. Please read the important information at the back of this note. QuotedData is a trading name of Marten & Co Limited which is authorised and regulated by the FCA. Marten & Co is not permitted to provide investment advice to individual investors categorised as Retail Clients under the rules of the Financial Conduct Authority. Contents Domicile Guernsey Add text Market outlook 4 Inception date 22 December 2005 Add text Valuations and recovery potential 5 Manager/Adviser David Cornell / Add text Gaurav Narain The big – COVID – picture in India 6 Market cap 122.1m Add text Rise of the SMID cap 7 Shares outstanding 112.5m Add text (exc treasury shares) Manager’s view – Not as bad as it looks 8 Daily vol. (1-yr. avg.) 308.4k shares Net cash 2.2% Add text Playing the economic recovery 8 Push for growth 9 Click here for our most Asset allocation 9 recent annual overview note Top 10 holdings 10 Click here for an updated Performance 12 IGC factsheet Attribution 13 Click here for IGC’s peer group analysis Other portfolio developments 14 Peer group – marked improvement in IGC’s near term relative Click here for links to share performance 14 trading platforms Premium/(discount) 17 Fund profile 18 Analysts Exit opportunity 18 Jayna Rana [email protected] Management arrangements 19 Matthew Read [email protected] Recent developments 19 James Carthew Alignment of interest 20 [email protected] Previous publications 20 India Capital Growth At a glance Share price and discount Time period 31 May 2016 to 15 June 2021 Like many other funds, IGC’s 125 0 discount was impacted by the onset of the pandemic. As discussed in our 105 -10 notes of May 2020 and December 2020, IGC published a series of 85 -20 proposals regarding its future on 26 May 2020, which led to a dramatic 65 -30 narrowing of its discount. At 15 June 2021, IGC’s shares were trading at a 45 -40 discount of 11.8%, which is more 25 -50 akin to its levels prior to the onset of May/16 May/17 May/18 May/19 May/20 May/21 the pandemic. Price (LHS) Discount (RHS) Source: Morningstar, Marten & Co Performance over five years Time period 31 May 2016 to 31 May 2021 As we said in our December 2020 200 note, IGC has until December 2021 to prove itself but, as discussed in 175 later the performance section, it is 150 clear that it has made an excellent start, with the fruits of the change in 125 investment process clearly visible. 100 Stock selection had previously weighed on IGC’s performance, 75 relative to the S&P BSE Mid Cap 50 Index. However, following the May/16 May/17 May/18 May/19 May/20 May/21 changes, the improvement in Price Rebased NAV S&P BSE Mid Cap MSCI India performance is particularly evident over the past year. Source: Morningstar, Marten & Co Year ended Share price NAV Portfolio S&P BSE Mid Cap MSCI India total return (%) total return (%) total return* (%) total return(%) total return (%) 31/05/2016 53.3 49.3 58.9 52.6 34.8 31/05/2017 2.2 3.8 3.8 2.5 3.5 31/05/2018 (4.5) (11.9) (11.9) (2.9) 12.9 31/05/2019 (45.4) (37.0) (37.0) (25.0) (20.6) 31/05/2020 107.0 82.5 82.5 67.8 46.5 Source: Bloomberg, Morningstar, Marten & Co. * Note rebased NAV returns (see explanation on page 12) Update | 17 June 2021 3 India Capital Growth Market outlook India was one of the better performing markets during 2020, with the MSCI India Index returning 12.0%, only slightly behind the total return for the MSCI World Index at 12.3%. By way of comparison, the UK market was down 13.2% over the year. Year-to-date, India is up 10.1%, versus 8.2% for MSCI World but still behind an 11.7% return for the UK, which has so far achieved a successful ongoing vaccination programme and easing of lockdown. Figure 1: Currency movements versus US$ (from January 2020 to 10 May 2021) 20 10.8 7.6 10 7.2 6.7 4.9 3.1 1.0 0.3 0 -0.4 -1.5 -3.0 -3.3 -10 -20 -19.8 -30 -31.1 -40 -39.2 -50 Source: Ocean Dial Asset Management, Bloomberg. As at 10 May 2021. Figure 2: Foreign exchange reserves (US$ bn) 4000 3500 3,349 3000 2500 2000 1,392 1500 1,084 1000 586 584 541 457 494 443 371 356 500 269 257 225 211 199 181 179 165 157 0 Source: Ocean Dial Asset Management, Bloomberg. As at 10 May 2021. Update | 17 June 2021 4 India Capital Growth As illustrated in Figure 1, the Indian Rupee appears to have held up relatively well over the pandemic, having fallen by just 3.3% against the US dollar since January 2020, which differentiates it from some other emerging markets. IGC’s managers think that this is a reflection of the macroeconomic stability that Prime Minister Narendra Modi and his government have brought about. As illustrated in Figure 2, India has strong foreign exchange reserves and IGC’s managers say that this, as well as increased foreign direct investment, is supporting low currency volatility. Though the Association of Investment Companies (AIC)’s India sector was the worst The AIC’s India sector was performing for April in share price terms (down by 3.7%), it appears to have bounced the worst performing in April back in May, as the second-best performer, with a median share price total return but bounced back to the of 6.7% and median NAV total return of 5.5%. The median discount, however, is still second-best performer by wide at 12.8% as at 31 May 2021. May 2021. Valuations and recovery potential IGC’s portfolio currently trades at 16x historic earnings, and 12.9x one-year forward earnings, with earnings per share growth of 35% and 24% respectively. In comparison, the Nifty 50 Index (a benchmark Indian stock market index that represents the weighted average of 50 of the largest Indian companies listed on the national stock exchange) is more expensive, trading at 20.3x historic earnings and 17.6x one-year forward earnings, with comparable historic earnings growth of 36% and 15.4% earnings growth over the next twelve months. As illustrated in Figure 3, the ratio of corporate profits to GDP is at a multi-year low (it is now at its lowest since 2003) suggesting strong recovery potential. The managers think there is the potential for a longer-term upward earnings revision cycle if this ratio returns to its mean level of 3.5 to 4%. Figure 3: BSE corporate profits to GDP ratio (%) 5 4.4 4.5 4.0 3.8 4 3.7 3.6 3.3 3.3 3.3 3.5 3.2 3.1 2.9 2.8 3 2.7 2.6 2.6 2.5 2.5 2.2 2.1 2 1.6 1.6 1.4 1.5 1 0.5 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Source: Ocean Dial Asset Management, Ace Equity Update | 17 June 2021 5 India Capital Growth The big – COVID – picture in India Figure 4: India total COVID cases Figure 5: India new COVID cases 35,000,000 450,000 Total case 400,000 30,000,000 numbers New cases decelerating 350,000 have reduced 25,000,000 dramatically 300,000 20,000,000 Marked 250,000 acceleration in Marked 15,000,000 total cases 200,000 acceleration in 150,000 10,000,000 new cases 100,000 5,000,000 50,000 0 0 Jan/20 Apr/20 Jul/20 Oct/20 Jan/21 Apr/21 Jan/20 Apr/20 Jul/20 Oct/20 Jan/21 Apr/21 Source: Our World in Data, Marten & Co Source: Our World in Data, Marten & Co Figure 6: India total COVID deaths Figure 7: India new COVID deaths 400,000 5,000 4,500 350,000 New deaths 4,000 have reduced 300,000 Marked 3,500 dramatically acceleration in 250,000 3,000 COVID-related Marked 2,500 acceleration in new 200,000 deaths 2,000 deaths from mid- 150,000 1,500 March 100,000 1,000 500 50,000 0 0 -500 Jan/20 Apr/20 Jul/20 Oct/20 Jan/21 Apr/21 Jan/20 Apr/20 Jul/20 Oct/20 Jan/21 Apr/21 Source: Our World in Data, Marten & Co Source: Our World in Data, Marten & Co Figure 8: India total vaccinations Figure 9: India new vaccinations 250,000,000 6000000 New vaccinations dropped due to supply issue but these appear 200,000,000 5000000 to have been addressed 4000000 150,000,000 Total vaccinations 3000000 have been on a 100,000,000 strong growth Clear ramp up trajectory 2000000 in vaccination 50,000,000 programme 1000000 0 0 Jan/20 Apr/20 Jul/20 Oct/20 Jan/21 Apr/21 Jan/20 Apr/20 Jul/20 Oct/20 Jan/21 Apr/21 Source: Our World in Data, Marten & Co Source: Our World in Data, Marten & Co Update | 17 June 2021 6 India Capital Growth Over the past week, national capital, Delhi and financial hub, Mumbai, are among the regions across the country that have started to reopen, albeit partially.