Results analysis: Ashoka India Equity

• Ashoka India Equity (AIE) has reported its annual results for the year ending 30/06/2022. The trust delivered net asset value (NAV) and share price total returns of 9.6% and 7.7% respectively. Over the same period AIE’s benchmark, the MSCI India IMI Index, delivered returns of 7.2% on a total return basis in sterling terms, meaning the trust outperformed by 2.4% on a NAV basis.
• These positive results build upon an already impressive track record. Since its inception in July 2018 to the end of the reporting period, AIE delivered NAV and share price total returns of 75.4% and 73.4% respectively, compared to benchmark total returns of 33.9%. Performance has continued to be strong since, with AIE’s NAV increasing by 20.6% and its share price by 23.0% from the end of June to 20/09/2022.
• Outperformance was driven by the trust’s exposure to financials, utilities, and real estate. The managers have noted sizeable increases in input costs for companies in the portfolio due to rising inflation. However, they have mostly been able to pass these costs on to customers and have even taken market share from competitors that have been less capable of doing so.
• The trust traded at an average premium of 1.15% in the year. As a result, the trust was able to undertake three block listings in the 12 month period, issuing 18,350,279 new shares and raising £35,954,000.
• The outlook for Indian companies remains positive. Earnings growth for companies in the NIFTY 50 is set to hit 33% in 2022, with a CAGR of 16% projected for the next two years. Exports have also risen, reaching their highest level on record in the first half of 2022. Manufacturers pivoting away from China, as well as incentive schemes by the Modi government and favourable demographic trends, seem likely to continue driving this trend.
• Chairman of the board Andrew Watkins said: “The innovative investment options presenting themselves to the company’s management teams are only likely to increase in the coming years, thus further enhancing the possibility of capital growth for shareholders over the longer term. It is gratifying from my perspective to be able to reassure shareholders that strong corporate governance and research both continue to play prominent roles when selecting investments for the company’s portfolio. We all hope that 2023 will see an easing of hostilities in Europe, restored supply lines, reduced inflationary pressures and lower interest rates. Not much to hope for, surely? If achieved, the signs are already emerging that India’s economy will gather strength as the world returns to growth.

Kepler View

Ashoka India Equity (AIE) is one of a small number of trusts on the market today providing investors with dedicated exposure to Indian companies. The management team focus on stock selection, using a proprietary valuation system and a heavy emphasis placed on corporate governance, rather than using top-down, macroeconomic analysis to pick stocks.

AIE also has a unique fee structure, with the managers receiving no annual management fee. Instead, they are compensated by a performance fee, which is paid if the trust outperforms on a NAV basis over three-year periods. Analysts are compensated according to how well their stock picks perform and fees are paid in shares, all of which we believe strongly aligns the interests of investors and the managers.

Performance since the trust’s inception in July 2018 has been strong. From inception in July 2018 to 20/09/2022, AIE shares have delivered total returns of 113.5% and NAV total returns of 116.9%. Over the same period, the MSCI India IMI Index, the trust’s benchmark index, has delivered total returns of just 75.1%. We think last year’s outperformance was even more impressive given the extremely volatile macroeconomic environment.

We think there are reasons to be optimistic about AIE’s long-term prospects as well, with Indian companies poised to benefit from some positive tailwinds moving forward. Tax incentives, a skilled labour force and concerns about China have all led manufacturers to move operations there. One sign of this was the increase of total US imports originating in India from 1.6% two years ago to 2.0% in the first half of 2022. These seemingly small incremental increases can lead to double-digit revenue growth for manufacturers. In the shorter-term, the manager reports that earnings growth for companies in the NIFTY 50 remains strong, and forecast a CAGR of 16% over the next two years. Inflation is a problem but India’s central bank has been proactive in raising rates to combat it and the core services inflation rate remains comparatively low at approximately 4%.

Moreover, the managers have seen signs that companies AIE owns are capable of handling these macroeconomic pressures, with firms, for the most part, passing on costs to customers and even taking market share from competitors. We believe that AIE’s focus on corporate governance will be of particular use in this environment. Analysts at the trust carry out approximately 3,000 company meetings per year and are stringent in ensuring any companies in the portfolio have strong corporate governance structures in place. The trust was trading at a premium of 2.7% on 20/09/2022, a sign that market participants also believe the trust is well-placed to deliver returns moving forward.