Research on the Company
Marten & Co.
Marten & Co Ltd provides non-independent research for ICGF
Needs more time
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.
Discounted Value
India Capital Growth (IGC)’s portfolio was trading at just 12x FY21 earnings at the end of August. The manager says that when it last hit that level, in August 2013, IGC delivered a 197% return in sterling over the following three years. Stocks have begun to rebound but there could be much more to go for and there is scope for IGC’s discount to narrow further.
A return to earnings growth
Earnings figures for the companies in India Capital Growth (IGC)’s portfolio are on an upward trajectory as India puts the disruptive effects of demonetisation and the introduction of the Goods and Services Tax (GST) behind it. Rising oil prices may be a headwind but India’s domestically focused economy should be relatively sheltered from a global trade war. Gaurav Narain, investment adviser to IGC, thinks we could see companies in his portfolio reporting average earnings growth of at least 20% per annum for the 2019 and 2020 fiscal years.
Shore Capital
Shore Capital Stock Brokers Ltd (previously Stockdale Securities Limited) acts as a broker and adviser and provides non-independent research for ICGF
Capitalise on secular growth
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.
Quality matters
Stock selection will play an increasingly important role in driving equity returns as rates increase in developed economies. The team managing the India Capital Growth Fund (IGC) believes that most companies in the fund’s portfolio are of higher quality than the benchmark index, while trading at similar valuations. The Indian economy is adjusting to two key policy events which slowed earnings growth in several companies over the last year. Earnings are now recovering from these shocks and the team expects companies in the IGC portfolio to realise total growth in EPS of c.58% over the next two financial years. We strongly believe that the long-term growth opportunities offered by India will be best captured by a fund like IGC. Given its historic performance relative to both the benchmark index and its peer group, we recommend that investors buy IGC for its exposure to Indian equity markets
On the road with IGC
We spent four days during the middle of March accompanying Ocean Dial, the managers of India Capital Growth Fund on an investor trip to India. The meetings included a broad mix of companies, members of the broking community, the media as well as government officials. While the issue of nonperforming loans within the banking sector is expected to restrain growth from re-accelerating significantly from c.7% figure it stands at, in the short-term the policies being implemented by the BJP government lay the foundation for an acceleration in growth in the future. We continue to recommend that investors buy India Capital Growth Fund (IGC) to capture India’s accelerating growth.