Aberdeen New India underperformed despite epic rebound

Aberdeen New India (ANII) has published its annual results for the year ended March 31, 2021, in which its NAV experienced an epic rebound from its March 2020 lows (it provided a net asset value total return of 52.7%), although it underperformed its reference, MSCI India Index, which rose 59.1% (all in terms of total return in pounds sterling). However, aided by a reduction in its discount from 20.3% to 13.6% over the year, ANII delivered a total share price return of 65.6%.

Market review

The year under review saw a marked rally for Indian stocks as the market rebounded from multi-year lows seen after the Covid-19 strike in early 2020. In March 2020, India entered a strict lockdown to curb the spread of the pandemic. This resulted in a sudden halt in business activity which saw India’s GDP figures plummet to historically low levels. ANII leaders say the decline was compounded by the fact that economic growth had started to flatten in previous quarters. However, the authorities responded with unprecedented monetary easing and fiscal stimulus to support those hardest hit. By October 2020, cases of infection had declined and social distancing measures had been relaxed, allowing commercial activity to restart. This, coupled with good monsoons which have supported rural spending, has led to optimism about the recovery in corporate earnings. More good news came with the vaccine rolling out towards the end of 2020, followed by a pro-growth budget in February 2021. However, towards the end of March 2021, infection rates increased again, resulting in new localized blockages. This prompted the central bank to continue adopting an accommodative monetary policy, despite inflationary fears related to a rebound in oil prices.


Unsurprisingly, the pandemic has made some Indian companies winners, while others have faced their most difficult test in many years. ANII managers say that among those who have benefited from the growing adoption of cloud computing, the increase in remote working and the acceleration of digitization were ANII’s holdings in the service sector. IT, where the portfolio is widely exposed. Mphasis contributed to returns by winning record contracts with companies turning to digital transformation solutions. In communications services, Affle India, an ad-tech holding company newly introduced during the year, also recorded impressive price gains. ANII officials claim that as a dominant and profitable data platform provider for direct digital advertising in India, the company is benefiting from increasing digital adoption, mobile penetration and commerce electronics in the country. Managers believe India offers attractive growth prospects in the internet space, but point out that there are limited opportunities in the internet space. listed universe. This makes Info Edge another great addition to the portfolio. Managers describe Info Edge as the leading online classifieds company. They say they have a dominant position in recruitment and real estate research. It also has a profitable and cash-generating activity which has enabled it to build a portfolio of technological start-ups.

Additionally, companies that were more leveraged for a cyclical recovery outperformed over the period. In this regard, ANII’s higher exposure to consumer staples, namely Nestlé India and Hindustan Unilever, and a more defensive positioning in finance through Kotak Mahindra Bank mean that portfolio returns have fallen. not followed the strong rebound in the market. However, managers say they continue to favor these high quality stocks that generate consistent profits throughout cycles. They believe this will allow ANII to maintain its resilience even as India heads into another period of uncertainty with the continuing resurgence of Covid-19 cases.

ANII’s exposures to real estate and construction were among the main contributors to performance. Although both sectors were among the hardest hit at the height of the pandemic in March 2020, ANII’s investments in what managers say are industry leaders have provided positive returns. These companies experienced growth ahead of their besieged rivals who had suffered a liquidity containment crisis. In this regard, leading residential real estate developer Godrej Properties has seen healthy growth in pre-sales thanks to its well-established brand and reputation with homebuyers. Although the recent spike in infections may once again have a short-term impact on sales, executives say that over the long term, structural demand in the real estate sector is expected to benefit from a favorable environment of favorable housing policies and low mortgage rates. . In addition, Godrej Properties is one of the main beneficiaries of the industry consolidation. With its financing advantage and operational capacity, the company is optimistic about acquisition opportunities that executives believe will improve its land reserve.

UltraTech Cement also delivered results above expectations. It has in fact gained market share and demonstrated pricing power, being one of the few companies with the financial strength to grow its capacity. Industry fundamentals should strengthen with the recovery in construction activity, driven by the improvement in the housing and infrastructure cycle. Managers say the latter has been a long time coming and may finally be on the verge of an expansion with the government reaffirming its commitment to infrastructure spending.

During the year, managers added a new position in Larsen & Toubro which they believe will benefit from government pressure for more infrastructure and affordable housing. Elsewhere, India’s energy transition is accelerating and the government is committed to investing more in renewable energies. Managers believe that Power Grid, a national electricity transmission company in the utility sector, also introduced during the year, should benefit. They say this public sector company is managed prudently and has a healthy operating cash flow, supported by a strong balance sheet. Gas also has a major role to play as a cleaner fuel substitute. The stakes in the gas distributor Gujarat Gas and the integrated player in gas and liquid logistics Aegis have thus been strengthened.

ANII executives say the good performance of these two holdings compensated for their decision not to invest in Reliance Industries. Reliance Industries shares lost some of their earlier gains following weaker third quarter results, cautious outlook for refining and petrochemicals; and the execution challenges encountered in its new consumer business. The managers say that within Reliance’s business portfolio, the brightest short-term prospect could be in its telecommunications division. This is because the industry is currently going through a period of repair and market consolidation after a tough operating environment brought on by a debilitating price war. For the same reason, the managers reintroduced Bharti Airtel to the portfolio. They say it remains the leading provider of telecommunications services with a pan-Indian reach and a sophisticated customer base with higher average mobile spend.

In terms of other divestitures, Lemon Tree was sold at the start of Covid-19 as the company entered a difficult period for the hospitality industry with significant debt on its balance sheet that would have generated financial stress. Grasim Industries was sold so that managers could focus ANII’s cement exposure on its subsidiary Ultratech Cement, which the managers say offers more direct exposure to housing and infrastructure spending. Similarly, the managers pulled out of Kansai Nerolac and focused the ANII paints exhibition on industry leader Asian Paints. Profits were also taken in Hero MotoCorp and Varun Beverages. The managers say that after a strong stock market performance, the stock prices of the two companies have started to reflect unrealistic growth expectations.

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