London stock markets still attractive for Indian small caps, despite slowdown

Monday, January 16, 2012 | Posted by: Grant Thornton
Categories: India, India Watch Issue 15 | Tags: India, Grant Thornton, performance, India Watch, emerging markets, FTSE, London Stock Exchange, India Hospitality Corp, private equity, economic growth, sector trends, iEnergizer, london markets

Indian SMEs outperformed other small caps on the London markets in 2011, despite an overall muted performance across all indices. Year-end figures suggest the UK capital is still a strong contender for Indian businesses seeking markets in which to raise finance.

The Grant Thornton India Watch Smaller Caps Index fell by just 11.27% during the year, compared with falls of 27.26% on the FTSE AIM 100, 25.75% on the FTSE AIM All-Share and 21.22% on the FTSE AIM UK 50.

Less risky large and mid-cap investments were also affected as investors grew nervous about a number of factors including continued slow economic growth in the West and a spreading of the eurozone sovereign debt crisis. The FTSE 100 fell 5.55% and the FTSE/ASEAN Index fell 7.37%.

The India Watch Smaller Caps Index seems to have benefited from the general shift among investors towards emerging markets in the hope that they would prove more resilient than developed markets. While the value of emerging markets investments may still have fallen, investors are hopeful that returns will bounce back faster than other investments when growth finally recovers.

No real sector trends emerged from the year-end figures for the India Watch Index. While the highest climb was in support services and the biggest fall in travel and leisure, most sectors were represented among the winners and losers.

iEnergizer, a call centre operator and supplier of outsourced back office processes, had a sterling first full year on the London markets after floating on the London Stock Exchange in September 2010. It gained 53.95% during 2011, the year’s top climber on the India Watch Index. It was also one of the top three climbers in Q4 2011, gaining 17.20%.

Interim results for the six months ending 30 September 2011, released last month (December 2011), showed iEnergizer’s revenue up 33.6% on the year to US$30.5 million and profit after tax up 32.6% to US$9.5 million. Non-executive chairman of the board Sara Latham said the increase was down to organic top-line growth and tight control of operating margins.

Investors have so far been happy with iEnergizer’s performance and, in December, the company raised £7.14 million through a placing of 3 million new ordinary shares. The extra funds are likely to be used, in part, for acquisitions after CEO and founder Anil Aggarwal said such a deal was needed to take the company to the next level.

Other full-year climbers on the India Watch Index include Alpha Tiger Property Trust (18.75%) and EIH (18.18%), an Isle of Man-based financial services company that offers investors access to a diversified Indian private equity portfolio.

The year ended on a low for hotel and restaurants group India Hospitality Corporation (IHC), which fell over 12 months by 88.21% – the index’s biggest loser. Against the backdrop of a flat year for India’s hospitality sector, IHC has continued to make losses albeit a significant reduction of 51.9% on the year, indicating a move in the right direction, led by an experienced and ambitious management team.

Other major losers on the India Watch Index in 2011 were real estate company Trinity Capital and media group DQ Entertainment, which fell 69.23% and 67.32% respectively.

Trinity Capital, which is seeking to divest its investments and return funds to investors, delivered a downbeat interim statement in December. An economic slowdown in India was leading to a reduction in the pool of potential buyers for its investments, it said. A seven per cent depreciation of the rupee against sterling had also led to an 11% decline in the £71.9 million value of its portfolio.

DQ Entertainment’s share price fell steadily through 2011 from around 132 pence at the beginning of the year to around 41.5 pence in early January 2012. The animation group has been struggling to bring widening net losses under control.

Last year may have ended under par but many market watchers are surprisingly upbeat about what 2012 holds in store for equities. While performance in the first half of the year will continue to be volatile, many predict an eventual resolution of the Eurozone crisis. There are also hopes that control over inflation in China will give all emerging economies an added boost. The India Watch Index will benefit from both developments. Year-end figures in 2012 should offer more reason for good cheer.

Anuj Chande
Partner, Corporate Finance
and Head of South Asia Group
Grant Thornton UK LLP
T +(44) (0)20 7728 2133

* The India Watch Index consists of 31 Indian companies listed on AIM or the Main Market (excluding GDRs). We only consider companies to be Indian if they are domiciled in India and/or foreign companies holding Indian assets or Investment companies with Indian promoters. The index has been created via Datastream, a Thomson Reuters product and is weighted by Market Value. To avoid distortion of index trends, the two largest market cap entities, Essar Energy and Vedanta Resource, are excluded.~

** Data sourced from Thomson Reuters.

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