Market and Performance review

India was actually among the most resilient markets in what was an exceptionally turbulent year for global risk assets. The Year was marked by rising inflation, slowing global growth, and the ongoing Ukraine conflict. There were also challenging moments such as banking sector turmoil in developed markets, emanating from the US.

Despite these external headwinds, the Indian economy continued its post-pandemic recuperation. Aided by increasing government capital expenditure and easing supply chain worries, the services sector gradually improved while we witnessed a manufacturing revival. While this was underway, inflation eased to a 16-month low by the end of the Year to sit at 5.7%.

Looking at the portfolio's performance over the Year, it is perhaps best explained in two distinct periods. Between April and December 2022, the Company's performance fell sharply behind the Benchmark. However, between January and March 2023 - performance was much improved and recouped some of the earlier losses.

Over the first period, the key reasons for the under-performance against the Benchmark were: not holding any of the Adani group of companies (the "Adani Group") in the portfolio, negative stock selection in Azure Power Global and Piramal Enterprises, the poor returns from the IT services stocks, and not holding Mahindra & Mahindra in the early part of the review period. We discussed these reasons in greater detail in the Half-Yearly Report for the six months ended 30 September 2022 (available from www.abrdnnewindia.co.uk) and while we had taken some profits from our IT services holdings, our overall overweight exposure to the sector detracted from performance during the early part of the Year.

Over the first period, the key reasons for the under-performance against the Benchmark were: not holding any of the Adani group of companies (the "Adani Group") in the portfolio, negative stock selection in Azure Power Global and Piramal Enterprises, the poor returns from the IT services stocks, and not holding Mahindra & Mahindra in the early part of the review period. We discussed these reasons in greater detail in the Half-Yearly Report for the six months ended 30 September 2022 (available from www.abrdnnewindia.co.uk) and while we had taken some profits from our IT services holdings, our overall overweight exposure to the sector detracted from performance during the early part of the Year.

For the second period, as the final three months of the Year, the recovery in performance was mainly due to the unravelling of the Adani Group, which started in January 2023 after the publication of a highly critical report by a US short-seller; a key event which your Chairman has made a reference to also. We believe in investing in businesses that are backed by reputable promoter groups with a track record of delivering value to all shareholders. We continue to view the Adani Group as lower quality stocks given their weak financial track records, highly over-leveraged balance sheets and major ESG concerns, which make them risky bets in our view, which we have not been prepared to expose the portfolio to. We have always been clear about our reservations over the transparency and accounting practices of the Adani Group and the dramatic share-price collapse is a vindication of our rigorous investment process that filters out low-quality companies from the outset.

The relative contribution from the financials sector also turned positive. The share price of PB Fintech, which operates the online insurance platform Policybazaar, staged a strong recovery after its results showed that it was on track to turn profitable - in terms of its earnings before interest, taxation, depreciation, and amortisation (EBITDA) - in the next financial year. It was one of the high-quality growth stocks in the portfolio whose share price was depressed heavily in 2022 due to the rotation away from growth to value, despite displaying healthy fundamental characteristics.

Our holdings in core banks such as ICICI Bank and HDFC Bank also held up better than other lenders as the banking sector was weighed down by concerns over the collective exposure to Adani loans. In addition, HDFC Bank's upcoming merger with HDFC appears to remain on track, which we viewed as positive for the stock, and our exposure to it.

These holdings were also buoyed by better credit growth, higher interest rates and good asset quality.

Our industrial capex and infrastructure-related holdings also contributed to better relative performance. ABB India's strong portfolio of products and services benefited from the recovering capex cycle. The company also plans to invest US$121 million (approximately £97 million) over the next five years to expand its capacity to meet growing demand. Power Grid Corporation of India, which benefits from the country's need to invest in power infrastructure, outperformed after delivering good results. UltraTech Cement performed well, as the company ramped up capacity, driven by strong demand from infrastructure and housing and rising private sector capex.

Aegis Logistics, in the energy sector, remains a strong performer, which is well-positioned to capitalise on continued growth in demand for Liquid Petroleum Gas in India with its key terminal infrastructure in strategic locations along the country's coastline.

On the other hand, our e-commerce, IT services and real estate sectors remained under pressure for the latter period.

In consumer discretionary, e-commerce company Nykaa continued to experience a falling share price despite delivering robust growth. However, we were concerned about the series of management changes the company had been through and have since sold the holding. Crompton Greaves Consumer Electricals fell short of earnings expectations due to weaker consumer durables demand amid high inflation - we have also reduced the holding as the macro backdrop remains challenging for the company.

Elsewhere, our real estate holdings, namely Godrej Properties, was held back by concerns that rising mortgage rates will affect demand. We have not seen any evidence of this as the company reported robust growth in residential home sales in the major markets. We maintain our conviction in the stock as Godrej remains in a good position, with a robust balance sheet, ahead of both the structural market consolidation and the industry upcycle, that we are anticipating.

IT services remained weak on global recessionary fears. As we are concerned that valuations in this sector do not reflect the slowdown in technology spending, we have continued to reduce the portfolio's exposure to the sector by selling Mphasis.

On the ESG front, we continued to engage with companies on various issues. Following our discussions with Affle India (corporate governance), Godrej Properties (green strategy) and UltraTech Cement (decarbonisation efforts), we made the first post-Covid trip to India in February 2023 which helped our engagement and understanding of the ESG issues in the portfolio.

Portfolio activity

The Company maintains an above-Benchmark exposure to financial services, which includes banks and life insurance, real estate, and healthcare. Within financials, we have added to our private banks' exposure with an initiation in Axis Bank as the stock is attractively valued and its turnaround strategy has started to show results. In Healthcare, we bought an initial holding in JB Chemicals, which is one of the top pharmaceutical companies in India, measured by sales.

As we remain positive about the industrial capex cycle and premiumisation trend within domestic consumption, we initiated a position in cable and wire manufacturer KEI Industries, leading domestic jeweller Titan Industries and Tata Consumer Products, a consumer products company with strong brands. These were funded with the sales of our lower conviction holdings mentioned above such as Mphasis, Nykaa, logistics and supply chain firm Delhivery and healthcare company Sanofi India.

Outlook

The next 12 months remains uncertain, with no end in sight to the Russia-Ukraine conflict, an expected rearrangement in global supply chains and a looming recession in the United States. However, India's swelling economy and domestic demand, robust macroeconomic management and proactive policy measures mean that the country is well-placed to tackle such external headwinds.

We remain confident that our portfolio, as positioned, has the right features to withstand the current challenging environment. In the short-term, once the global interest rate cycle peaks, we believe that the growth to value rotation will ease or even reverse, and our resilient, higher-quality, growth stocks will outperform. Given the quality and strong fundamentals of our portfolio holdings, we believe that your Company is well positioned to deliver on its performance objective for shareholders.

Kristy Fong and James Thom
Investment Manager
28 June 2023

Discrete performance (%) 

Total return; NAV to NAV, 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.

Important information

Risk factors you should consider prior to investing:

• The value of investments, and the income from them, can go down as well as up and investors may get back less than the amount invested.
• Past performance is not a guide to future results.
• Investment in the Company may not be appropriate for investors who plan to withdraw their money within 5 years.
• The Company may borrow to finance further investment (gearing). The use of gearing is likely to lead to volatility in the Net Asset Value (NAV) meaning that any movement in the value of the company’s assets will result in a magnified movement in the NAV.
• The Company may accumulate investment positions which represent more than normal trading volumes which may make it difficult to realise investments and may lead to volatility in the market price of the Company’s shares.
• The Company may charge expenses to capital which may erode the capital value of the investment.
• Movements in exchange rates will impact on both the level of income received and the capital value of your investment.
• There is no guarantee that the market price of the Company’s shares will fully reflect their underlying Net Asset Value.
• As with all stock exchange investments the value of the Company’s shares purchased will immediately fall by the difference between the buying and selling prices, the bid-offer spread. If trading volumes fall, the bid-offer spread can widen.
• The Company invests in emerging markets which tend to be more volatile than mature markets and the value of your investment could move sharply up or down.
• Yields are estimated figures and may fluctuate, there are no guarantees that future dividends will match or exceed historic dividends and certain investors may be subject to further tax on dividends.

Other important information:

Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. abrdn Investments Limited, registered in Scotland (No. 108419), 10 Queen’s Terrace, Aberdeen AB10 1XL. Both companies are authorised and regulated by the Financial Conduct Authority in the UK.

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