Research on the Company
Marten & Co.
Marten & Co Ltd provides non-independent research for ICGF
Though India’s second coronavirus wave – which started in March 2021 and saw as many as 414,000 recorded daily cases as recently as 6 May – has been described as one of the worst in the world, Gaurav Narain, India Capital Growth’s (IGC’s) investment adviser, believes the peak in infections has now passed. The number of new daily cases appears to be falling and the country’s vaccine rollout is ramping up after a temporary slowdown following production constraints.
India, the world’s fifth-largest economy, has rebounded very strongly as COVID-related restrictions have eased; a fact that Gaurav Narain, India Capital Growth’s (IGC’s) investment adviser, believes has caught many observers by surprise. The key indicators suggest further recovery from here (India’s PMI was 56.3 for November) and Gaurav says that recent results have generally surprised positively. As was discussed in our last note, IGC’s manager, has enhanced its investment process and recent performance shows a marked turnaround in its returns relative to its competitors (IGC’s NAV was up 48.2% during the half year to 30 November 2020, versus an average of 25.3% for its peers – see page 19).
India Capital Growth’s (IGC’s) board is asking investors to back a continuation vote scheduled for 12 June 2020 and it is important that shareholders make their vote count. COVID-19 has depressed valuations to levels not seen since the financial crisis. The managers see substantial upside when market confidence returns and are asking for more time to deliver that. The board believes shareholders should support the continuation of the company. This reflects their confidence in the measures taken to turn performance around, which we discuss in this note. When small and mid-cap valuations return to trading at long-term average valuations, IGC’s share price could improve meaningfully.
Shore Capital Stock Brokers Ltd (previously Stockdale Securities Limited) acts as a broker and adviser and provides non-independent research for ICGF
India Capital Growth Fund (IGC) is a company offering investors exposure predominantly to India’s small and mid-cap companies. As IGC has significantly underperformed the BSE Mid Cap Total Return Index, its Board has brought forward the continuation vote and proposed a sequence of actions. These include extensive measures to improve performance, a redemption offer at the end of 2021 and a reduction in the fee IGC pays to the Investment Manager, Ocean Dial. The Board believes that this is a better option than winding up IGC, when mid-cap and small-cap equities are trading at close to their 15-year lows, in valuation terms. The Board is recommending that shareholders vote for its proposals at the EGM to be held on 10 June 2020.
The Indian economy entered the COVID-19 crisis in a relatively weak position. A sequence of structural measures including demonetisation and the introduction of the Goods and Services Tax (GST) had sapped the growth rate of the economy. A shadow banking crisis followed the surge in non-performing loans in public sector banks as inflation rates declined. We believe that India will exit the lockdown on 18 May 2020. A bold fiscal and monetary package (around 10% of GDP) is being proposed and we believe that this coupled with major structural pro-growth steps that the government is likely to announce will set the stage for a revival of the Indian economy and allow mid and small cap companies to navigate these difficult times and resume on their growth path in the medium-term. India Capital Growth (IGC) offers investors exposure to a portfolio of resilient mid and small companies, trading at attractive pre-COVID valuations, well placed to capitalise on the revival of growth in India.
The re-election of the NDA led by Narendra Modi sets the stage for continuity of policy and implementation of further reforms. While the Indian economy faces short-term headwinds, the secular growth prospects justify higher valuations. Gaurav Narain, the portfolio advisor of India Capital Growth Fund (IGC), believes that IGC’s portfolio of midcap stocks is well positioned to benefit from India’s growth. The underlying aggregate portfolio earnings for IGC have compounded at 22% in INR terms since FY 2015 and Narain expects earnings for portfolio companies to grow by 27% this year. While recent performance has been relatively weak, the valuations of portfolio companies are at a level, where IGC has typically outperformed large-cap indices such as the Nifty, in the past.