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Powerful growth, what next?

Infrastructure funds, unlike other sector funds, have so far given twin benefits of diversification and high returns. But it’s time now to pick and choose.

Tanvi Varma/Money Today        Print Edition: April 3, 2008

Ved Prakash Chaturvedi
"Since infrastructure bears a long term profile, SIP investing with a long-term approach through this route has special merit"

Ved Prakash Chaturvedi, MD,Tata Asset Management
R Swaminathan
"Considering India needs to raise its primary energy supply by over three times and generation capacity by six times, the sector holds promise"

R Swaminathan, VP and National Head of Mutual Funds, IDBI Capital

Undeterred by the volatility and falling stock prices and discounting the fears of a slowdown in the US economy, every passing month has seen the launch of a new infrastructure fund. In January alone, when the Sensex had a record breaking crash, four new infrastructure funds mopped up Rs 7,600 crore.

Till recently, performance had kept pace with the excitement. If you had invested Rs 1 lakh in infrastructure funds three years ago, your corpus would have grown to Rs 3.5 lakh. ICICI Prudential Infrastructure Fund has clocked a return of 68% in the past one year followed closely by the Tata Infrastructure fund at 59%. Although a power centric fund, Reliance Diversified Power Sector fund has been one of the largest benefi- ciaries in this space, posting a return of 90%. Most of the funds within this category have delivered returns in excess of 50% over the past one year, compared to a modest 30% return delivered by the Sensex (see table on page 15). There are 17 funds schemes in this category, more than any other category.

Yet infrastructure funds are unlike any other sectoral fund. When somebody invests in a sectoral fund, he is betting that that particular sector will outperform the broader market. But in case of an infrastructure fund, he is betting on at least 8-10 different sectors. The underlying theme is infrastructure but the mechanics of the energy sector are very different from the factors that affect the construction industry or the capital goods sector. So, the vast diversity in the portfolio of an infrastructure fund reduces the risks generally associated with sectoral funds.

Click here to see a detailed table on infrastructure funds

Of course, not all funds follow the same mandate and some have taken very concentrated bets on certain sectors. ICICI Prudential Infrastructure Fund, for instance, is highly skewed toward the energy sector with 21% of its portfolio invested in it. Worse, nearly half of that exposure (almost 9.5% of the total portfolio) is in one stock— Reliance Industries. The lesson: your exposure and allocation could vary hugely depending on what scheme you choose to invest in. To be sure where you are putting your money, read the investment mandate of the infrastructure fund more carefully than you would of any other sector fund.

So far, a major growth in performance for the infrastructure sector has come from the power, construction and the real estate sector. Some of the high valuations are actually present discounted value of future expected growth.

“Given the fact that there was expectation of long-term earnings visibility, the valuations of several companies have run up since the markets often discount future earnings upfront,” says Ved Prakash Chaturvedi, managing director, Tata Asset Management.

In leaps and bounds
Is the best of infrastructure story already over? Or can you still expect good returns if you invest now? “Anyone wishing to link his fortune to the way GDP grows in the country should participate in infrastructure funds,” says Tushar Pradhan, CIO, AIG Global AMC. However, investment in this sector should be made with a time horizon of at least 3-5 years. Most of the NFOs in this space too have reiter-ated this view by launching closedended funds for a period of three years. Although there is no rule of thumb, one can look at an exposure of 10-15% into these funds, reckon analysts. “Since infrastructure as an investment opportunity bears a long-term profile, systematic investment plan (SIP) investing with an approach towards saving for the long term through this route has special merit,” says Chaturvedi. Shahina Mukadam, head of research, IDBI Capital Market expects earnings growth of 30-35% from certain sectors over the next 2-3 years. Her top picks include NTPC, Reliance Energy, Bhel, ABB and JP Associates.

Since the government is one of the biggest investors and consumers in the infrastructure sector, its plans, commitments and policies will have a major impact on stock prices. According to a Planning Commission report, investment in infrastructure needs to increase from 5% of the GDP to 9% by 2011-12—i.e. an investment of Rs 20,00,000 crore until 2012. With 30% of the planned capacity diverted to the power sector, this sector is among the most attractive investment avenues. “Considering India needs to increase its primary energy supply over three times and generation capacity by six times, the sector as such holds promise,” says R. Swaminathan, Vice-President and National Head of Mutual Funds, IDBI Capital. The key beneficiaries will be companies providing generation equipment, transmission companies i.e. companies engaged in construction of towers, cables, insulators, transformers, etc as well as power utilities and power exchange companies.

Sectors covered by infrastructure funds

• Real estate
• Construction
• Capital goods (engineering)
• Power sector
• Metals and mining
• Cement
• Financial companies
• Oil & gas
• Airports
• Shipbuilding
• Telecom
• Transportation

The stocks in these sectors account for more than 75% of the total market capitalisation.
These are the likes of Bhel (the largest supplier of power generation equipment), L&T, ABB, Siemens, Power Grid, NTPC, etc. Companies engaged in the business of road construction are in the reckoning too considering the huge impetus from the National Highway Development Programme. Other sectors which will get a tremendous boost from the planned outlay are telecom, irrigation and ports. And if you wish to diversify globally, a few funds also give you the option to participate in the global economy, considering certain regions like Asia are expected to grow at 8.3%, with China leading the pack.

These funds are backed by a strong economy but are not immune to the global economic meltdown. During the recent crash, led by recessionary fears the US, these funds lost anywhere between 17% and 25% (year to date). However, India’s infrastructure investment is not impacted by the US slowdown. Some of the other risk factors that could curtail growth are execution risks, cost of funding projects and policy changes (remember the stand-off over telecom spectrum that affected valuations). In any case, an infrastructure fund should not be your first mutual fund. If you have limited money to invest, a diversified fund is a better option considering it would have exposure to infrastructure as well as other promising sectors such as consumer durables or technology, says Dhirendra Kumar, CEO of Value Research. Go for an infrastructure fund only if you already hold a well diversified portfolio.

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