The Fund outperformed its benchmark in April following a frustrating March. Our overweight position to the consumer discretionary sector helped as a number of stocks we hold posted strong returns. In addition some of our infrastructure and materials related stocks also gained strongly in April. Motherson Sumi, a stock we have held for some time rebounded following a weak period of price returns. This is a company focused on auto ancillaries, in particular it has a globally strong position in the wire harness business (a beneficiary of increasing electronic content in autos) as well as other areas. The company has expanded globally both organically and by acquisition in other auto related areas to diversify geographically and gain exposure to various auto manufacturers. The stock price was cheered by a new acquisition that looks very attractive on price and fit. The company has a target to reach a turnover of US$18bn by 2020 and it looks well on track to achieve that milestone.
Our one stock purchase in April was also in the auto related space as we bought Sandhar Technologies, a company that has just been listed. Sandhar is a multiproduct auto component maker – the largest supplier of auto lock assemblies and second largest two wheeler rear view mirror manufacturer in India. As the largest manufacturer of construction and agricultural equipment cabins, it has a growing non-auto business as well. The stock listed at a very cheap valuation in comparison to other sector stocks for over 20% revenue growth for the next few years and higher profit growth due to significant operating leverage with no new capital expenditure needed for three to four years.
We retain our view that the Reserve Bank of India (RBI) is being too hawkish over concerns of an inflation shock, and that macro worries are somewhat overplayed in the market currently. While we are not being complacent about the risks of further gains in the oil price, we find few signs of exuberance that would indicate an economy growing above its potential. India’s macro environment is in a far healthier state today than it was a few years back when the country was included in the infamous group of countries referred to as “the fragile 5”.
Sentiment among domestic investors in particular has deteriorated somewhat, despite more signs of a growth revival coming through and earnings pretty much on track even against high expectations. We are in the middle of the fourth quarter 2018 earnings season and what is particularly noteworthy so far is the volume recovery we are seeing among domestic companies. This to us is a good indicator of an economic recovery, even if it is yet to be fully reflected in profits. One source of unease for existing earnings expectations remains the corporate and public sector banks, where hopes of a recovery hinge on the resolution of long-running non-performing loans (NPL) issues.
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