Preliminary Results

RNS Number : 1690P

India Capital Growth Fund Limited

20 March 2009

 

20 March 2008

INDIA CAPITAL GROWTH FUND LIMITED

PRELIMINARY ANNOUNCEMENT OF RESULTS FOR THE YEAR ENDED 31 DECEMBER 2008

CHAIRMAN'S STATEMENT

The Board was deeply saddened to receive news of the tragic death on 28 February 2009 of Micky Ingall, who had been Chairman of the Company since its launch in December 2005. The Board would like to pay tribute to his leadership of the Company and the Board through its early years, exercised with wisdom and energy. Throughout his time as Chairman he was a passionate advocate of the long term potential of India. He was a strong supporter both of the Company's investment philosophy and of its investee companies, many of whom he met on the annual Board visit to India. We will miss him greatly. 

He had already drafted a statement for this Report, and the Board believes it right that his draft should remain the Chairman's Statement.

'2008 has been an exceptionally disappointing and difficult year. After a very good 2007 the year started with high hopes that India with its fast growing economy could escape the recession already looming in the Western economies. However the rapidly escalating price of oil stoked inflationary fears and the Reserve Bank of India was forced to raise interest rates. More importantly for the Stock Market these events broke the nerve of international investors who were already repatriating billions of dollars in a vain attempt to create liquidity at home. The massive inflows of funds to India in 2007 reversed dramatically, and with limited liquidity, the Indian Stock Market turned into one of the worst performers globally.

By the second half, when the oil price turned and inflation abated, the world was already gripped by a full blown financial crisis and India did not feature in a flight to safety. The appalling Mumbai attacks in November and the Satyam fraud at the end of the year were further unsolicited blows. As often happens in sharply falling markets, small companies, in which ICGF is predominantly invested, suffered worst. At every downward lurch we felt it prudent to hold our nerve and even now consider it best to retain our interest in our chosen companies which in most cases have strong balance sheets and earnings that remain positive, although at lower rates than previously predicted.

Looking to the future, India is a notable beneficiary of a lower oil price, and inflation has fallen sharply enabling interest rates to be reduced. GDP growth in India remains strong, albeit slower than in the recent past, but in marked contrast to the recessions elsewhere. Mumbai has recovered from the attacks with commendable speed, and the Satyam affair, although worrying, would seem to be a problem as much for the international accounting community as for India in particular.

To say we are optimistic for 2009 may seem reminiscent of a scratched gramophone record, but the medium term prospects for India seem greatly superior to those of most other countries. It seems unlikely that the Indian stock market will recover before there is more certainty in the world financial system; and the Indian elections in May are a further source of uncertainty. We are however a closed-end fund with no gearing and can afford to be patient even though this remains an extremely painful time for shareholders.'

On behalf of the Board

Robin Nicholson

Acting Chairman

19 March 2009

SUMMARY INVESTMENT MANAGER'S REPORT

Summary and the market environment 

The performance of the ICGF portfolio in 2008 has been extremely disappointing as, together with the Indian market as a whole, it succumbed to the contagion impact of the US financial crisis. The depth and severity of the consequent recession in most economies around the world has been like a tidal wave that has brought ICGF's NAV crashing down.  

Foreign Institutional Investors ('FIIs') sold a net USD 13.4 billion in 2008. Together with their domestic Indian counterparts, they sold off their small cap holdings first, and the lack of liquidity in these stocks resulted in small cap company share prices suffering the most. The BSE Small Cap index fell 72.4% in the year while the larger Cap BSE Sensex fell 52.4%. 

The first half of 2008 

The slide in the Indian stock market began in early 2008, with high oil and commodity prices creating a spike in the Rupee inflation rate. FIIs, who found themselves with losses in other investment markets, began realising gains in India. This process accelerated and domestic investors could not absorb the stock sold without significant price falls. However, at that stage economic activity and sentiment remained strong, and quarterly profits reported by listed companies continued to show good growth. 

The second half of 2008

The second half of the year began with a further sharp deterioration in the US financial sector. Liquidity problems were exacerbated by credit concerns and property and equity markets worldwide fell sharply with the economies of first the UK, then Europe, Japan and much of Asia (excluding India and China) following the US into a recession that some analysts believe will be the worst since the Great Depression of 1929.  

In India, the Reserve Bank of India ('RBI') reacted to higher inflation (the wholesale prices index ('WPI') rose to a peak of 12.91% on 12 February 2008) by dramatically increasing interest rates with the Repo rate peaking at 9% on 30 July 2008. However, this, together with global liquidity problems and a flight of capital, precipitated India's own, partly RBI driven, domestic liquidity problems that reached a critical point in October 2008. Inflation has since fallen sharply (the WPI was 3.03% on 21 February 2009) and while the RBI subsequently reduced rates (the Repo rate was reduced to 5.5% on 2 January 2009 and to 5.0% on 4 March 2009), the effect of these rates cuts has not yet flowed through in any significant way to corporate and retail borrowers. 

The BSE Sensex fell to its lowest level in over 3 years, and in terms of trailing twelve month PE multiples the BSE Sensex at 31 December 2008 was at a 5 year low. Property prices have also fallen although the degree varies from city to city.  

The positive effects of falling commodity prices, especially those such as oil that are denominated in USD have been partly offset by the Rupee's depreciation against the US Dollar, although the Rupee has appreciated against Sterling.

Key questions we have examined are:

• To what extent is the Indian economy affected by global recession? 

• What are its prospects in the short term (the next one year)? 

• How will ICGF investee companies' performance and share prices be affected?

India is driven by domestic consumption and investment and is also a services driven economy. Thus global contagion impacts India less than other countries. However while domestic savings rates are high (35% of GDP on a gross basis and 25% on a net basis) the two major direct impacts and one indirect impact of the global recession are:

• Investment: where overseas funding for both equity and debt has a significant impact. Net FII flows in the listed markets were very substantially negative and foreign direct investment flows outside the stock markets were substantially down on those for 2007.

• Manufacturing: where the fall in exports has resulted in both lower industrial activity but also in a higher current account deficit (India has a merchandise trade deficit of 10% of GDP and a current account deficit of 2%).

• The fall in asset prices (equity and real estate): which has affected the urban consuming class many of whom had become equity and property investors for the first time during the preceding three years.

Domestic consumption still drives the economy overall and this is expected to continue to grow, albeit at a slower pace than in 2008. The discretionary and high priced consumption sectors - real estate, auto and auto components - are the most affected by the downturn. Sectors dependent on daily consumption and relatively lower priced products continue to grow, as does the Indian financial sector where demand for credit remains high and there is currently a low incidence of non-performing loans. 

In terms of the equity markets, participants no longer hope for an immediate return to late 2007 levels but most expect a levelling off (stagnation, or range-bound trading). A key event that will affect market sentiment in the next six months is the general election to be held by May 2009, and it is likely that markets will become particularly volatile around this time.

In our view the Indian economy is going through a very painful cyclical correction rather than a recession, with GDP growth continuing, albeit at a lower level than in the recent past, unlike most other global economies where GDP is falling. Even the most pessimistic economists have GDP growth estimates for India of 4% to 6% for the next one year. In the short term the negative impact of global recession and the RBI's increase in rates during the first half of this year are still being felt. In the medium term drastically lower commodity prices and falling inflation together with the RBI's now lower interest rates will impact positively.

Portfolio performance and investment strategy 1 January 2008 to 31 December 2008

The table below summarises ICGF's NAV performance in the three years since its launch in December 2005.

Change Over:			Year 1	Year 2	Year 3
			2006	2007	2008
Net assets GBP mn (at 31 December)			69.9	123.0	32.2
Undiluted NAV			- 4.9%	+ 76.0%	- 73.9%
Diluted NAV			- 4.9%	+ 64.5%	- 72.0%
BSE Sensex			+ 46.7%	+ 47.1%	- 52.4%
BSE Mid Cap			+ 31.1%	+ 68.6%	- 67.0%
BSE Small Cap			+ 16.0%	+ 93.7%	- 72.4.%
INR vs. GBP			- 11.6%	+ 9.4%	+ 11.1%

NAV performance has been extremely disappointing in 2008. However, despite the falling stock market, the fundamental prospects of investee companies remained sound throughout 2008 and we considered it appropriate to pursue a strategy of being substantially fully invested. The strategy throughout the year was to:

• Continue to support existing investee companies which we believe have an attractive future and not to sell in panic. Even so, fundamental company analysis has meant little in an extraordinarily volatile market dominated by pressures on forced sellers and the flight of FIIs where the fall in share prices has affected smaller companies and those with low liquidity (ICGF's focus areas) the most.  

• Maintain a concentrated portfolio where the manager understands, monitors and can assist investee companies. There were only 24 companies in the portfolio as at 31 December of which the top 5 made up 44.8% and the top 10 made up 67.8% of the portfolio. The risks of a concentrated portfolio arise when a few of the larger investments do not do as well as expected. In ICGF's case, while the portfolio has underperformed the BSE Small Cap index (if Sterling's depreciation against the Rupee is taken into account), we believe that in the longer term concentration should achieve superior returns, not least because we understand these companies and believe that their fundamental performance and potential will in the future be reflected in their share prices.

• Focus on small and midsized companies. This is the area of the market that is least explored by institutional investors and where over the longer term we see attractive returns. All the listed investments were categorized as small cap as on 31 December 2008.

The above three key features of the investment style (long term investments in small and mid sized companies with a concentrated portfolio) were stated objectives when ICGF was set up, and remain the core focus of the Group. 

Market position of investee companies

The current market turmoil has hit small companies the hardest especially in terms of their share prices. However in India many sectors of the market are still not dominated by large incumbents. The opportunities for small and midsized companies to grow and build profitable and dominant market shares are many. Looking forward many of the ICGF portfolio companies have strong market positions that can be built on successfully. A summary of the market positions of the top six companies representing 50% of the portfolio will be set out in the full Annual Report.

Analysis of fundamental performance of investee companies 

The table below shows a summary of the fundamental operating performance of the top 10 Portfolio companies for the first 9 months of their current (to 31 March 2009) fiscal year. Averages can be misleading and full results will be shown for each of these companies in the full Annual Report. However broad trends from the summary are, we believe, worthy of comment.

Top 10 Portfolio Company Averages / To 31 December 2008				9 Months to 31.12.08
Revenue growth over comparable previous period				50.0%
PAT growth over comparable previous period				1.5%
PAT margin				10.1%
Operating Margin (EBITDA %)				29.2%
TTM Interest Cover				2.9x
TTM PE				5.7
ROE				13.5%

Note: share prices used in the table above for PE multiple calculations are as at 31 December 2008. 

In summary:

• The economics of the businesses of the majority of portfolio companies remain largely intact and the management teams have so far managed their businesses and reacted to the extremely difficult environment well. 

As shown above the average top line growth is healthy for the 9 months to 31 December 2008 as was that for the quarter to 31 December 2008. While four of the smaller companies in the portfolio made a loss in the quarter to 31 December, all the others were profitable and operating margins were also high. However interest costs have risen sharply and it is the effect of these higher interest rates that have affected most of the ICGF investee companies rather than a slowdown of demand for their products or services. As mentioned earlier, this is on the back of higher RBI rates during most of 2008, (and while rates have now come down, banks have not yet passed these on to companies). Interest cover remains manageable for these top 10 companies, although it is tighter for some of the smaller companies in the portfolio. All companies should benefit once actual borrowing rates reduce which is expected to be during the course of 2009. 

• Current valuations are, we believe, extremely attractive based on both the economics of the businesses and DCF valuations as well as in terms of ratio analysis and market multiples. Once markets stabilize, investee companies' underlying performance should once again be reflected in their share prices. 

Comments on the individual results of the top 10 companies will be set out in the full Annual Report.

Conclusion

Despite the many challenges India faces it is one of the few large countries with a reasonable GDP growth rate. For ICGF investee companies 2008 has been a tough year. Some companies have not managed the changed environment well and for those few whose medium to long term future is in doubt we have sold out or are in the process of selling out. Other portfolio companies are profitable and we believe have sound market positions, good prospects and are at low valuations. Our analysis shows significant upside even at modest PE ratios. We are therefore continuing to add selectively to existing holdings, and we continue to research potential additions to the portfolio. 

We are deeply saddened at the sudden and tragic death of Micky Ingall. As Chairman of the Company he had been a great support to us as Managers and to our colleagues in the Investment Advisor in India. He willingly gave of his time and his experience to help and guide us. His steady hand, constructive criticism and wise counsel will be sorely missed.

India Investment Partners Limited 

19 March 2009

PRINCIPAL GROUP INVESTMENTS

AS AT 31 DECEMBER 2008

HOLDING	TYPE	SECTOR	VALUE £000'S	% of PORTFOLIO
Bilcare Limited	Small Cap	Pharmaceutical services & packaging	3,595	11.18
Marwadi Shares and Finance Limited	Unlisted	Financial services	3,067	9.54
S Kumars Nationwide Limited	Small Cap	Textiles	3,052	9.49
Varun Shipping Limited	Small Cap	Shipping	2,565	7.98
ICSA India Limited	Small Cap	Process controls	2,117	6.59
Prime Focus Limited	Small Cap	Media	1,685	5.24
Grabal Alok Impex Limited	Small Cap	Textiles	1,668	5.19
Logix Microsystems Limited	Small Cap	IT	1,599	4.97
IOL Netcom Limited	Small Cap	Media	1,335	4.15
Great Offshore Limited	Small Cap	Offshore oil & gas services	1,107	3.44
Total top 10 investments			21,790	67.77
Other Small and Mid Cap (12 companies)			6,875	21.38
Other Unlisted (2 companies)			250	0.78
Total invested assets			28,915	89.93
Cash and other net current liabilities			3,236	10.07
Total Portfolio			32,151	100.00

CONSOLIDATED INCOME STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

				01.01.08 to	01.01.07 to
				31.12.08	31.12.07
		Revenue £000	Capital £000	Total £000	Total £000
Income
Fixed deposit interest		150	-	150	187
Bank interest income		16	-	16	32
Investment income		553	-	553	625
		719	-	719	844
Net (losses)/gains on financial assets at fair value through profit or loss
Market movements		-	(103,617)	(103,617)	62,142
Foreign exchange movements		-	13,289	13,289	667
Total income		719	(90,328)	(89,609)	63,653
Expenses
Management fee		(849)	-	(849)	(1,274)
Performance fee		-	-	-	(8,280)
Cost of acquisitions and disposal of investments		-	(160)	(160)	(317)
Other (expenses)/income		(374)	120	(254)	(640)
Total expenses		(1,223)	(40)	(1,263)	(10,511)
(Loss)/profit for the year before taxation		(504)	(90,368)	(90,872)	53,142
Taxation		(17)	-	(17)	(18)
(Loss)/profit for the year after taxation		(521)	(90,368)	(90,889)	53,124
(Loss)/earnings per Ordinary Share - Basic (pence)				(121.19)	70.83
(Loss)/earnings per Ordinary Share - Diluted (pence)				(121.19)	70.63

The total column of this statement represents the Group's Income Statement, prepared in accordance with IFRS. The supplementary revenue and capital columns are both prepared under guidance published by The Association of Investment Companies.

All the items in the above statement derive from continuing operations.

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2008

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2008	750	(2,729)	52,713	(571)	72,877	123,040
Gain/(loss) on investments	-	6,813	(110,430)	-	-	(103,617)
Revenue loss for the year after taxation (excluding foreign exchange losses)	-	-	-	(521)	-	(521)
Cost of acquisition and disposal of investments	-	(70)	(90)	-	-	(160)
(Loss)/gain on foreign currency	-	(1,325)	14,734	-	-	13,409
Balance as at 31 December 2008	750	2,689	(43,073)	(1,092)	72,877	32,151

CONSOLIDATED STATEMENT OF CHANGES IN EQUITY

FOR THE YEAR ENDED 31 DECEMBER 2007

	Share Capital £000	Capital Reserve		Revenue Reserve £000	Other Distributable Reserve £000
		Realised £000	Unrealised £000			Total £000
Balance as at 1 January 2007	750	(285)	(3,913)	487	72,877	69,916
Gain on investments	-	7,515	54,627	-	-	62,142
Revenue loss for the year after taxation (excluding foreign exchange losses)	-	-	-	(1,058)	-	(1,058)
Cost of acquisition and disposal of investments	-	(136)	(181)	-	-	(317)
(Loss)/gain on foreign currency	-	(1,543)	2,180	-	-	637
Other expenses charged to Capital	-	(8,280)	-	-	-	(8,280)
Balance as at 31 December 2007	750	(2,729)	52,713	(571)	72,877	123,040

CONSOLIDATED STATEMENT OF ASSETS AND LIABILITIES

AS AT 31 DECEMBER 2008

		31.12.08		31.12.07
		£000		£000
Non-current assets
Financial assets designated at fair value through profit or loss		28,915		117,935
Current assets
Cash and cash equivalents		3,431		9,944
Receivables		8		3,203
		3,439		13,147
Current liabilities
Payables		(203)		(8,042)
Net current assets		3,236		5,105
Total assets less current liabilities		32,151		123,040
Equity
Ordinary share capital		750		750
Reserves		31,401		122,290
Total equity		32,151		123,040
Number of Ordinary Shares in issue		75,000,000		75,000,000
Undiluted Net Asset Value per Ordinary Share (pence)		42.87		164.05
Fully diluted Net Asset Value per Ordinary Share (pence)		42.87		153.38

CONSOLIDATED CASH FLOW STATEMENT

FOR THE YEAR ENDED 31 DECEMBER 2008

		01.01.08 to		01.01.07 to
		31.12.08		31.12.07
		£000		£000
Cash flows from operating activities
Investment income		554		648
Fixed deposit interest		150		187
Bank interest		19		29
Management fee		(975)		(1,196)
Performance fees		(7,654)		(626)
Other cash payments		(422)		(561)
Net cash outflow from operating activities		(8,328)		(1,519)
Cash flows from investing activities
Purchase of investments		(40,249)		(37,908)
Sale of investments		42,157		40,629
Transaction charges relating to the purchase and sale of investments		(160)		(316)
Net cash inflow from investing activities		1,748		2,405
Net (decrease)/increase in cash and cash equivalents during the year		(6,580)		886
Cash and cash equivalents at the start of the year		9,944		9,082
Exchange gains/(losses) on cash and cash equivalents		67		(24)
Cash and cash equivalents at the end of the year		3,431		9,944

This preliminary announcement was approved by the Board on 19 March 2009. It is not the Company's statutory accounts, but has been prepared on the same basis as those accounts. The statutory accounts for the year ended 31 December 2008 have been approved and audited and received an audit report which was unqualified and did not include a reference to any matters to which the auditors drew attention by way of emphasis without qualifying the report.

The full Annual Report together with the audited accounts for the year is expected to be mailed to shareholders on 26 March 2009 and a copy will be posted on the Company's website www.indiacapitalgrowth.com in accordance with AIM Rule 26.

Enquiries:

India Capital Growth Fund Limited

Northern Trust International Fund Administration Services (Guernsey) Limited (Secretary)

Andrew Maiden               01481 745368

India Investment Partners Limited (Manager)

James Winterbotham        020 7802 8902

Arbuthnot Securities Limited (NOMAD)

Alastair Moreton              020 7012 2000

 

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