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How India Capital Growth plans to narrow its discount

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How India Capital Growth plans to narrow its discount

Following a stellar six months, India Capital Growth (IGC) is seeking to list on the main market of the London Stock Exchange – a move it hopes will finally narrow its persistent discount.

The board would like to move the fund’s listing from the Alternative Investment Market in a bid to improve India Capital Growth’s reputation, liquidity and valuation. If all goes to plan, the board intends to complete the move by the end of this year.

‘Clearly AIM has its place, but we want to make ourselves available to a broader investor base. Also, we want the trust to be compared more directly to the peer group: Aberdeen New India and JPMorgan Indian both trade on the main market,’ explained fund manager David Cornell of Oceal Dial Asset Management.

The decision to list on the main market forms the final part of a four-stage plan that has been in place for the last eight to nine years, Cornell said.

‘The first stage was to restructure the portfolio. The second stage was to change the shareholder base. The third was to raise money and the fourth is to narrow the discount the shares trade at relative to net asset value (NAV).

'It has been a long drawn-out and detailed plan to win back investor confidence. The move to the main board is a natural part of that process,’ the fund manager said.

Cornell said the team did not have plans to buy back shares or to return money to shareholders, two tactics that are typically used to narrow discounts. Instead, he hopes the trust’s performance will speak for itself and attract a broader range of investors.

The team focuses on Indian mid-caps which meet ‘quality’ criteria, for example through their management team or track record.

During the first half of 2017, India Capital Growth grew its net asset value (NAV) by 23.8% to £124 million. This was 2.5% higher than the trust’s benchmark – the BSE Mid Cap index. Meanwhile, its share price rose by 27.7% over the same period.

Avendus Capital’s buy of Ocean Dial earlier this month should also help to attract new investors to India Capital Growth, Cornell (pictured below) said. This is because the fund could appeal to Avendus’s branch of wealth managers across India.

Modi's magic

It has certainly been an eventful time for India, following the government's demonetisation programme, which saw the withdrawal of all 500 and 1,000 rupee notes last November. This equated to 86% of all currency notes in circulation. The fund manager believes this programme has ultimately proved successful.

‘The demonetisation process has passed relatively smoothly and the benefits of that are starting to come through in the form of higher tax revenues for the government, less “black money” and corruption,’ he said.

In July, the government implemented the goods and services tax, a nationwide VAT. Cornell expects this will support economic growth over the long term because it removes inefficiencies in the system and reduces tax evasion. Nevertheless, he is braced for some short-term pain.

‘This is because the entire eco-system needs to be IT-enabled, and many of the smaller businesses are just not geared for this. Also the switchover from the old system to the new system has created confusion, with businesses across the country destocking so as to minimise any negative impact.

'Even the government admits that there will be one or two quarters of adjustments before the system gets back to normal,’ he explained.

On the positive side, Cornell has spotted one trend that provides scope for optimism: namely, savers shifting money away from cash, gold and real estate into the stock market.

‘Domestic mutual, pension funds and family offices are switching away from bonds, real estate and black money into equities. What we need now is for earnings to catch up,’ he said.

Cornell describes markets as looking ‘fairly valued’ right now.

‘There is value out there, but you need to look a lot harder than a year ago,’ he added.

Looking ahead, the fund manager is confident that Modi (pictured) has the credentials to push through much-needed reform in India, which makes the investment case for the market attractive right now.

‘India is the fastest growing economy on the planet. Macro-economic indicators, such as the current account deficit and fiscal deficit are in great shape. Inflation is coming down. It may not stay at a low level, but we see it as very much under control. We see further cuts to interest rates coming and a stable currency,’ Cornell said.

During the six months to July, India Capital Growth’s two largest positions performed very well: Dewan Housing, which provides home loans, saw its share price rose by 79.4%, while Federal Bank was up 68.8%.

India Capital Growth currently trades at a 20% discount to NAV. Over the five years to 16 August, its shareholders have enjoyed a 161.2% gain. This compares to 126.8% by Aberdeen New India (ANII), which trades at an 11.1% discount. Meanwhile, JPMorgan Indian’s (JII) share price has risen by 127.3% over the same period and trades on a 10.2% discount.

It is worth noting that India Capital Growth is more expensive than its rivals. Ocean Dial receives a management fee of 1.5% a year of total assets, including debt, compared to the 1% paid to Aberdeen and JPMorgan (the former's is applied to net assets excluding debts, according to Numis). 

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