Research on the Company
Marten & Co.
Marten & Co Ltd provides non-independent research for ICGF
Don’t Stop Believin’
India Capital Growth’s (IGC’s) adviser, Gaurav Narain, says that at a time when many economies and equity markets are struggling, there are many reasons to be optimistic about the outlook for the Indian economy. Although down in sterling absolute terms during the last 12 months, the Indian market made progress in local currency terms and has performed well relative to its emerging market peers, benefitting from a good run in the second half of 2022 from which IGC also benefitted.
Lessons Learnt
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.
A win-win scenario
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).
Shore Capital
Shore Capital Stock Brokers Ltd (previously Stockdale Securities Limited) acts as a broker and adviser and provides non-independent research for ICGF
Secular growth supports outperformance
Over the last two years we have seen Indian equity markets sharply outperform. While some mean reversion is possible in the short run, we believe that Indian equity markets are in a fundamentally strong position, despite the global headwinds. Companies in the portfolio of India Capital Growth Fund (IGC) are estimated to deliver c.30% annualised earnings growth over the next two years. A capex cycle is currently underway, supporting this strong earnings growth. With a redemption facility offered regularly to investors and trading at a 16% discount to it’s net asset value (NAV), India Capital Growth Fund (IGC) offers a prospect of strong returns over the next twelve months, not just from NAV performance, but also from further discount contraction.
Continuation vote, proposed redemption facility, amendment to articles and EGM
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.
Bold fiscal policy may start recovery
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.