After the new government coming to power, infrastructure funds are back in the limelight with the category delivering 50% return over a one year period. Rohit Singhania who manages DSPBR T.IG.E.R Fund shares his outlook on the infrastructure sector.
With the anticipation of a stable government and possible revival in infrastructure sector, infrastructure funds are back in the limelight. Is there an investment case in infrastructure funds at this juncture? If yes, what kind of time horizon should investors commit?
Infrastructure sector was plagued by environmental clearance issues, high interest rates, lack of coordination amongst ministries, etc. due to which the stocks underperformed. The government understands that infrastructure growth is important for the country. There is about 20,000 MW of power capacity in India which is ready for commercial use. It is stuck because of some issues (coal availability /PPA pricing). With the government keen on providing impetus to infrastructure growth, we expect the approvals for projects will come sooner. Over the next three years the infrastructure cycle will play out well. Investors have to commit some time in a thematic fund. Ideally, one should not invest more than invest 15% of investible corpus in thematic funds.
What steps according to you should the government and finance ministry take to help the infrastructure sector?
The government should try to fix some of the low hanging fruits in the next six to nine months. In the power sector a lot of capacities are ready. Plants will start running if the government gets the coal supply tie up and if they fix selling price with state electricity boards. The previous government had set up a cabinet committee on investments. They have already approved 90 projects worth Rs. 1 lakh crore. If these companies get the go ahead for these projects it is for these companies to set the ball rolling. This could be achieved in the near term. It will take some time for the new government to announce big ticket projects. We don’t expect interest rates to come down for the next six to nine months.
Two of the key challenges over the last few years have been land acquisition and environment clearances. On the environment clearance front, we need a compression of the bureaucracy and time lines not just at central level, but also at the state level. The new minister's statement about adopting a "transparent and time-bound mechanism" is step in the right direction. On land acquisition, while keeping the higher compensation in place, the addition of clauses in the land acquisition bill giving the industry certainty on acquisition would go a long way in kick starting capex.
Do you see clubbing of power, coal and new & renewable energy portfolio under one minster benefitting the industry?
They have merged the portfolios but there is no clarity on how they’ll operate. But prima facie it looks good. Power generators use coal as raw material. When the ministry is under one umbrella you know what both your hands are doing. The bureaucracy will be less. It has never happened in the country earlier. We’ll have to see how it pans out.
While there are positive sentiments surrounding the infrastructure sector, have you witnessed any tangible improvement beginning to trickle in this space?
Very recently two infrastructure companies have upped their earnings guidance. If you talk to the managements you get a sense that the situation is improving. The sentiment is improving across all the sectors within the infrastructure space. It will take six to nine months for the results to be visible.
Have you shuffled the portfolio after the new government came to power?
We expected things to improve after the appointment of new RBI governor last year. We started to position our portfolio towards capital goods and public sector banks. Our portfolio composition has not changed much post election results.
Within the infrastructure space, which segment (telecom, construction, bank, etc.) do you think will benefit most from the formation of new government?
We are bullish on the power, road sector, construction and financial space. National Highways Authority of India (NHAI) has restructured premiums for previously bid out projects. They are talking about giving out new orders. We are also bullish on railway theme. No capex has happened in the railway space. Logistic companies and port operators will also benefit. These are the themes which will benefit the most. It helps the financial sector in two ways. If there is a pick-up in the industrial activity the credit growth of banks goes up. We have seen rise in banks non-performing assets (NPAs) from the last eight quarters because lot of companies could not able to re-pay loans. All this will reverse if projects are executed. Thus, the profitability of banks will improve. The balance sheet stress of banks will reduce.
The other way to think about it is as a timeline. First the developers' (whether in power, roads or other segments) balance sheets will need to be healed / fixed, then the banks will benefit from the improving health of the developers and lastly the construction and capital goods companies will see a new cycle of orders.
Which sectors are you avoiding within the infrastructure space?
We pretty much own everything. It is a circle. For instance, if you build a dedicated freight corridor you need lot of cement and steel. So all companies in the chain benefit. We are not avoiding anything but we are more bullish on power, road and developers. We are in a situation where there is lot of euphoria. In such a situation everything runs up irrespective of the fundamentals. We are avoiding companies where we don’t have confidence in company’s management and where the balance sheet is stretched.
What proportion of exposure do you plan to keep in various sectors?
We have invested 35% in financials, about 41% in capital goods/ infra space, 10% in materials and the balance related to economic reforms area. Change in sector exposure would be determined by stock ideas.
How do you plan to mitigate risk in the DSP BlackRock T.I.G.E.R Fund portfolio, given that it is a sector fund?
The scheme’s benchmark is BSE 100 where IT, pharma and FMCG constitute 35% weightage in the index. We don’t invest in these sectors because they don’t fall under the infrastructure sector. We have limited leeway to protect our portfolio. However, our stock selection process takes into account the overall risk associated with respective to the overall portfolio construct.
What are the risks associated with the infrastructure sector?
The first risk is interest rates which we don’t expect to come down for the next 6-9 months. Most infrastructure companies have piled up huge debt. Some of them are barely able to pay interest, not to mention about the principal.
Are you seeing inflows coming in this fund?
We were expecting inflows to come in much earlier but post elections we have seen some interest.
Are other schemes of your fund house increasing exposure to infrastructure sector?
Yes, our diversified funds are increasing exposure to infrastructure space.
Distributors say that it is better to invest in a diversified fund which has a flexible mandate than investing in a sector fund…
Like I said earlier, sector funds should be limited part of your portfolio. This debate will continue to exist. If you are bullish in this sector then risks will be rewarded.
Investors are not sure when to exit and enter. They sometimes exit after booking losses. Is opting for dividend plan more ideal in a sector fund?
Yes, dividend option is better because you are getting returns on regular intervals. Investors are now more educated. Financial advisors are doing a better job of educating investors.
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