In the year ended 31 March 2025, the Company’s net asset value (“NAV”) rose by 11.7% in sterling terms (total return), adjusted for Indian capital gains tax.

The Company has continued to recover most of the underperformance seen in 2021 and 2022 for two consecutive years now, as we have stuck to a quality investment philosophy and repositioned the portfolio towards promising market segments with long growth runways.

Market review

Since September 2024, when the Indian stock market hit an all-time high, we have witnessed a significant pullback and profit taking. We have seen a more acute correction in the small-and-mid-cap (“SMID”) space, which is not surprising given valuations in that segment were getting frothy. In contrast to developed markets, discounts for SMID stocks are lower than those for large-cap stocks in India with domestic investor interest sustaining higher valuations for the former. While our portfolio is skewed more towards large cap, our considerable SMID exposure delivered strong performance in calendar 2024, and considering this market correction, we are evaluating these stocks through a bottom-up quality lens.

In this environment, quality stocks have been resilient across the portfolio, including the core positions that contributed to relative returns, particularly in the last three months of the year. As such, the Company was able to deliver strong absolute returns over the full year that were significantly ahead of the 0.7% total return for the Benchmark.

There were several factors that drove the stock market lower in the second half of the year under review. On the domestic front, weaker consumer spending, lower government expenditure, and tight liquidity weighed on market sentiment. Externally, US President Donald Trump’s re-election to the White House triggered a broad-based rotation of capital out of emerging markets on the fear of imminent tariffs, geopolitical tensions, and the impact of a strengthening US dollar on emerging market currencies. India was no exception.

The central bank took steps to boost liquidity in the market, cutting interest rates by 0.25% in February 2025 and by another 0.25% in April 2025. Subsequently, in June 2025, it cut rates by a deeper-than-expected 0.5% and also announced a 1% cut to the cash reserve ratio that will inject additional liquidity into the financial system in a phased manner over the course of the fourth quarter. We expect this to act as a boost to the banking sector and to the economy more broadly. Meanwhile, on the fiscal side, the Indian Government’s FY2026 budget focused on consumption support for the middle class through readjusting income tax brackets to provide relief to taxpayers. We continue to believe that India is structurally well placed, in terms of its demographics, relatively supportive macroeconomic environment, and political stability. This holds true in light of the current uncertainties surrounding President Trump’s “reciprocal” tariffs on US trading partners, including India - in our view, India is relatively better placed compared to other emerging markets.

Performance overview

The portfolio delivered robust performance over the year, with the strongest returns coming from stock selection in the energy, financials, communications services and consumer discretionary sectors.

Our non-benchmark SMID cap position in Aegis Logistics did exceptionally well over the period, being the top stock performer. The share price has enjoyed a strong run as investors finally recognised what we had long seen; that this was a high quality, high growth small-cap stock that had been mispriced by the market. We scaled up the holding due to our strong conviction, despite the inherent volatility of small-cap stocks. Aegis continues to report strong performance with good underlying growth across the business that gives us confidence to maintain our position. Not holding Reliance Industries also added to relative returns, as the Benchmark bellwether lagged on softer gross refining margins and slowing retail business growth. We continue to avoid Reliance Industries and its subsidiaries on corporate governance grounds and capital allocation concerns.

Within the financials sector, the portfolio’s private sector banks did relatively better than peers amid the tight liquidity environment. ICICI Bank, one of the largest absolute positions in the portfolio, outperformed after reporting good results with standout deposit growth and asset quality. While HDFC Bank, another significant portfolio position, initially underperformed in the period as investors feared loan growth could be restricted and margins squeezed. We saw a gradual turnaround in the share price by the end of the Company’s year. Accordingly, reducing our position in the lender initially weighed on overall relative returns, which was offset by not holding other lower quality names in the banking sub sector. Meanwhile, the Reserve Bank of India rolled back its anticipated regulatory tightening while also reducing the burden on microfinance loans and bank loans to non-bank lenders.

Our non-benchmark position in financial services firm, KFin Technologies, also did well. We introduced the company to the portfolio at the start of the calendar year 2024, and its share price rose almost 200% over the year, supported by steady flows into domestic mutual funds. Seen as the proxy for the rise of the broader Indian equity market, the stock suffered from the post-September correction, seeing some sharp profit taking in recent months, before improving again during March. Holding both Bharti Airtel and Bharti Hexacom in the telecommunication sub-sector added to our performance. Both stocks performed well over the year as a result of strong fundamental characteristics, such as improving balance sheets and momentum in non-cellular businesses.

Within consumer discretionary, our core autos exposure in Mahindra & Mahindra did well. Indian Hotels, another new addition to the portfolio, also performed, where it is primed to benefit from the multi-year growth potential in the domestic travel industry, with consumers seeking more premium experiences and services.

A detractor from performance was our stock selection in the industrials sector, specifically in the capital goods subsector, where prices corrected following a strong run and amid a slower-than-expected pace of government and private spending. However, we continue to highlight ‘Building India’ as one of our six key investment themes for the market, and remain invested accordingly, maintaining positions in the highest conviction stocks in this sector whilst also protecting the portfolio from near-term volatility.

Overall, we think that the pull-back seen in the Indian stock market since September offered a much-needed pause, helping to ease valuations to more reasonable levels and removing some of excess froth from the market. This happened after three years of robust performance. In some cases, particularly in the SMID space, we have seen over-reactions in terms of downwards share price moves, which presents buying opportunities for bottom-up stock pickers like us.

Portfolio activity

We have continued to introduce attractive stocks that meet our quality criteria from a bottom-up perspective and are supported by favourable structural trends. Considering prevailing market dynamics, we have also added to our exposure in the health care sector, which we expect to be more resilient in periods of short-term economic volatility and potential growth slowdown.

We continue to also like the communication services sector where the outlook is favourable, hence we have topped up our existing holdings there. We funded the above moves by taking a bit of money out of the more cyclical sectors such as real estate and industrials, where we anticipate some near-term challenges.

Some of the stocks added during the year are:

Indian Hotels – one of the largest hospitality companies, which has evolved from a single brand luxury hotel to a range of brands across the hospitality ecosystem, catering to different price segments. Besides its strong brands, the company has a robust pipeline and healthy financials.

Poly Medicure – manufactures and supplies a wide variety of consumable medical devices. We like the strong management team that is becoming increasingly investor friendly and has a good record of surpassing its own guidance. The company has a net cash balance sheet despite investing heavily in doubling its production capacity over recent years.

Brigade Enterprises – a real estate company headquartered in Bangalore, with businesses in the residential, office, retail and hospitality segments. It has a competitive edge over larger players in terms of higher corporate governance and transparency.

Concord Biotech – active pharmaceutical ingredients (“API”) manufacturer focused on fermentation-based APIs enjoying favourable competition dynamics, given the specialised expertise required. The company's main driver is the steady growth of its existing core products, with the potential to enlarge its API portfolios further.

We continue to seek to secure local regulatory permissions to make unlisted investments in India.

Outlook

After being one of the fastest-growing major economies in recent years, the first tinges of doubt are creeping into India’s rosy growth picture: the economy is showing signs of a slowdown, the stock market corrected sharply in late 2024 and near-term corporate earnings expectations have become more muted. Multiple factors have contributed to this apparent slow-down, including weaker-than-expected consumer demand and reduced public spending, as well as relatively soft government revenue. In our view, this is a temporary cyclical slowdown and, in part, had been self-inflicted with the government focusing previously on fiscal consolidation whilst the central bank has tightened liquidity.

The long-term structural story remains intact, with little change to the key investment themes. There are also signs emerging of a long overdue recovery in rural demand, helped by a good monsoon while the upcoming harvest season should help keep food prices at manageable levels. The consumer-focused FY26 Indian national budget is further expected to help with middle income consumption demand. There is also emphasis from the government for more public private partnerships for infrastructure projects while the ‘Make In India’ manufacturing focus continues, with more money allocated to production-linked incentive schemes to encourage multinationals to set up production bases in the country.

On the external front, India is relatively more insulated from the potential impact of stiff tariffs compared to other markets given that the US has a relatively lower trade deficit with the country. The recent meeting between President Trump and Prime Minister Narendra Modi at the White House underscored the importance to US interests of the bilateral relationship in the Indo Pacific region. That said, currency turbulence could pressure the Indian rupee, but the Reserve Bank of India has ample forex reserves to come to the rescue.

One significant development, after the period end, was heightened geopolitical tension between India and Pakistan. Both sides exchanged fire in April 2025 after a militant attack on tourists in India-administered Kashmir. This escalation repeated a similar outburst in 2019 where the responses were targeted and measured. Subsequently, the countries agreed to a ceasefire, which, at the time of writing, continues to hold. This serves as a reminder of the geopolitical risk that India faces with regards to its neighbours that cannot be overlooked by investors.

From a stock-picking perspective, we are still finding pockets of good growth and quality across various sectors and sub-sectors even in this temporary market downturn. The Company’s downside is well-protected given our quality focus, and our defensive holdings are in a good position in case of profit-taking, and any correction in their share prices would be, in our view, a buying opportunity.

Important information

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Issued by abrdn Fund Managers Limited, registered in England and Wales (740118) at 280 Bishopsgate, London EC2M 4AG. The company is authorised and regulated by the Financial Conduct Authority in the UK.