In the year ended 31 March 2024, the Company’s net asset value (“NAV”) total return rose 27.8%, compared to an 8% decline in the previous year. A substantial part of that negative return was clawed back by sticking to our long-term quality investment philosophy and by repositioning the portfolio towards structurally attractive segments that are now paying off. However, the Company was not able to keep pace with the MSCI India Index, which rose 34.4%.

We explain the reasons below.

Total return; NAV cum income, with net income reinvested, GBP. Share price total return is on a mid-to-mid basis. Dividend calculations are to reinvest as at the ex-dividend date. NAV returns based on NAVs with debt valued at fair value. Source: abrdn Investments Limited, Lipper and Morningstar. Past performance is not a guide to future results.

Overall, the underlying fundamentals of our portfolio remain sound, and our companies continue to report healthy earnings growth, mostly in line with expectations.

Market Review

As the Chairman describes in his Statement, the Indian market had a strong run throughout most of the year, underpinned by a robust domestic economy and an enviable growth trajectory. Retail inflation has remained steady at just over 5%, while the Reserve Bank of India has not increased interest rates since February 2023. The estimated GDP growth rate for the full financial year was projected at 7.6%, surpassing the previous year’s figure of 7%, leading to India holding to its position as the world’s fastest-growing major economy. We did see some pullback in the market this year, particularly in the small-and-mid (“SMID”) cap space. After outperforming Indian large-caps last year, SMID companies corrected in March 2024 when the Indian securities regulator increased scrutiny towards domestic mutual funds due to rising valuations. We had been very selective in adding SMID names to the portfolio, preferring companies with good earnings visibility and a track record of delivering on growth. 

At the time of writing, India’s 2024 general election has just concluded, and the outcome came as a big surprise to the market. Polls had predicted that Prime Minister Narendra Modi and his party would comfortably win enough seats in the lower house of parliament to form a government on their own. Instead, Modi’s Bharatiya Janata Party (BJP) failed to secure a majority. This has forced Modi and the BJP into a coalition government for the first time in his career. Modi’s bargaining power within this alliance is likely to be reduced, with a possibility of ministries reshuffling and some of them being given to the non-BJP leaders. As a result, we will need to keep a close watch on Cabinet formation and capital allocation in the FY25 budget.

Thinking about the implications for policymaking, we view BJP's broad agenda around infrastructure, manufacturing, and technology is likely to continue, and would create structural tailwinds for the economy. New big bang reforms, however, are unlikely to come from a coalition government. Instead, we could see measures favouring populist agendas take precedence whilst there could be some moderation in capital expenditure. Job creation and tackling the rural economy could also take the spotlight.

The Company's quality focus and positioning in several defensive sectors such as IT Services, Consumer Staples, and, to some extent, Banking and Insurance, should provide resilience to the portfolio through the current market turbulence. Our conviction in our India holdings remains strong, re-enforced by recent trips and meetings with company management teams. Valuation dips could present buying opportunities.

Performance review

The strongest returns came from the holdings in property as well as from infrastructure and capital expenditure (capex) beneficiaries in utilities and industrials sectors. Our consumer, financials, and energy stocks, however, lagged the market’s rally. Real estate was the biggest performance driver, with our exposures benefitting from structural trends as well as the SMID rally seen throughout most of 2023. Property developers Godrej Properties (see the case study below) and Prestige Estates were the top stock contributors, reporting strong pre-sales numbers for their new housing projects. India is undergoing a long overdue recovery in residential property sales and the future prospects for the overall sector remain bright.

We were pleased to see that our repositioning towards industrial names and capex proxies has paid off. India has ramped up public capex by building more roads, railways, ports and similar projects to create additional jobs and revive private capex. Our holdings that benefited from this step-up in capital spending include ABB India as well as Power Grid Corporation of India. Power Grid has raised its capex guidance as its development pipeline and earnings visibility remain robust. Meanwhile, our telco exposure in Bharti Airtel (see the case study below) did well amid ongoing industry consolidation, and on expectations of a new tariff hike after the elections.

Some of our IPO names that were depressed in the previous year, due to the growth-to-value rotation in the market, have started to demonstrate positive performance. This includes affordable housing company Aptus Value Housing Finance and online insurance platform, PB Fintech.

Looking at where the Company has fallen short, HDFC Bank and Hindustan Unilever have both disappointed in growth and, therefore, in relative share price performance. HDFC Bank will now take longer to deliver integration cost savings following its merger with mortgage lender HDFC, in a tighter liquidity environment. A sluggish rural economy has acted as a brake on Hindustan Unilever’s growth. While we continue to believe in the medium-term investment theses for both stocks, we have partially cut these holdings to release funds for several of our new ideas discussed below.

In the energy sector, our holding in Aegis Logistics did well but trailed its peers – mostly public sector companies – which we tend to avoid owning in the portfolio. Index heavyweight Reliance Industries lagged in 2023 but saw a recovery in its share price in 2024. We do not hold the company due to reservations around capital allocation and governance standards.

Finally, within consumer discretionary, our auto holdings performed well but underperformed some of their peers. Not holding online delivery company Zomato also affected relative performance. While we are aware that we are lightly exposed here, this sector is seeing increasingly stretched valuations, and we believe it is necessary to tread with caution.

Overall, the underlying fundamentals of our portfolio remain sound, and our companies continue to report healthy earnings growth, mostly in line with expectations.

Portfolio Activity

During the year, we actively repositioned the portfolio to maximise potential returns. Key changes included scaling up the exposure to investment themes that we found attractive, provided we could find stocks that met our quality criteria from a bottom-up perspective in these sectors. These structurally attractive themes include: premiumisation, property upcycle, and infrastructure and capex beneficiaries. We also added some high-quality names based on stock-specific factors that were largely independent of more top-down themes.

Within consumer, we introduced a new SMID-cap addition in the automotive sector, Uno Minda, which provides auto components to four-wheeler and two-wheeler OEMs. In real estate, we added Phoenix Mills, which operates high quality shopping malls in top-tier and state capital cities with a good pipeline of new assets expected over the next few years. It is also a premium consumption play as India’s disposable income slowly tracks higher alongside growth.

In Industrials, we introduced Siemens India, the Indian arm of the German multi-national, as well as a SMID-cap name, Apar Industries. We also added Havells India, a proxy to the electrical and consumer durable sector, and building material company Pidilite, an indirect beneficiary of the housing cycle and home improvement trend. In Software & Services, we scaled back our position given the sector’s vulnerability to a slow-down in the core US market and a subsequent contraction in IT spend. However, we have also taken advantage of the price falls across the sector and added a new mid-cap name, Coforge, which provides niche IT services with deep domain expertise.

While financials remains our largest portfolio weight by sector, we broadened our mix of stock holdings. We added to NBFCs (non-bank finance companies) by initiating Cholamandalam Investment and Finance that has a long growth runway and has operating levers to mitigate against rate headwinds.  We also introduced KFin Technologies, a fast-growing player in the Mutual fund Registrar and Transfer Agency duopoly, benefitting from structural growth trends such as wealth accumulation in India. These were funded by reducing our banking exposure, primarily with the exit of Kotak Mahindra Bank.

Lastly, we also exited lower conviction holdings Asian Paints and Renew Energy Global to fund some of the new ideas.

Outlook

India is the world’s fastest-growing major economy, backed by a resilient macro backdrop that includes a real estate boom, strong consumer sentiment in urban areas, and a robust infrastructure capex cycle.

The growth story is underpinned largely by supportive policies from the central government as well as a decade of painful, but necessary economic reforms. The groundwork laid by these sweeping reforms has put India on a positive economic trajectory. We are also seeing early signs of a private capex revival. This can potentially continue to sustain both economic momentum and corporate earnings growth.

India still faces some near-term risks, most of which are external, including potentially higher global energy prices and a slowdown in the world economy. As a net oil importer, recent developments in the Middle East remain a potential source of concern as any escalation will push oil prices higher. As the Chairman noted earlier, valuation is also a perpetual risk – given its recent outperformance, India has become a consensus trade, with valuations becoming stretched, especially in small and mid-caps. The key to taking advantage of this market’s promise is bottom-up stock picking that is backed by fundamental research, which aligns well with how we invest.

The Company’s downside is well-protected given our quality focus, and our defensive holdings are in a good position in case of profit taking.  Furthermore, any correction in the market would be an opportunity to add to the holdings. The consistency of earnings growth of the portfolio remains healthy and individual company fundamentals, such as pricing power, strong balance sheets and the ability to sustain margins, remain solid.

Important Information

Risk factors to consider before investing: