Avoid Delays - Post Budget Analysis on Real Estate

Self Authored article in Times Property, a Times of India Publication dated Mar 31, 2012

Infrastructure Funds – poised to grow

A robust infrastructure; ask any individual he will define or relate it. Infrastructure has become a new catchphrase in India with more government allocations, both through policy reforms and increased spending. This has been well emphasized in Budget 2010 where a massive Rs. 1,73,000 crore or 46 per cent of total plan was allocated to infrastructure only. Infrastructure augments the growth of Indian economy and India’s economic growth has been attracting wide attention. The International Monetary Fund (IMF) has come out to state that Indian economy will grow at 9.7 per cent in FY 2010 and 8.4 per cent in FY 2011. The economy is on the fulcrum of an increasing growth curve; thus, economic prosperity is placing huge demands on infrastructure. It is attributed that India’s submissive infrastructure is the key reason for the country not achieving double digit GDP growth.

Though the Government of India has been addressing the infrastructure requirements, the pace of growth has been lacking.

Infrastructure – Has it performed well?

While Infrastructure has been defined differently from different Portfolio Managers, we have considered sectors such as Telecom, Consumer Goods, Utilities – Gas and Power, Real Estate, Petroleum and Gas, Engineering as basic components of Infrastructure (combining all the definitions as per different Offer Documents of Infrastructure Funds). Banks have also found a prominent place in major of the funds; so, we would also consider it.

Indian equity markets have delivered superb performance in the last quarter including CYTD , thanks to increased capital inflows and extended quantitative easing in developed countries which have forced cheap money to move into emerging markets including India too. India has emerged as the best performing market globally and is poised to be one of the earliest to scale its previous peak and create new highs. From peak of CY 2007-08, major sectoral movers are Auto, PSU-Banks, FMCG, Pharma and IT moving in the range of 39 to 71 per cent while the Engineering, Petroleum and Gas, Utilities, Telecom and Real Estate – which comprise predominantly Infrastructure have underperformed in the range of (-) 21 to (-) 72 per cent.

Does it say that the infrastructure story is over in India?

If we believe the 11th Five Year Plan (2007-2012), it calls for more than doubling the financial outlay for infrastructure. The investments will touch US $ 1.48 trillion by 2017. Some of the major developments in the past such as world class airports, flyovers, CWG Event which helped in creating world class sporting complexes (barring inappropriate use of funds) have proved to be the major boost to Infrastructure in the near future.

Similarly, we are on Capex boom (dhoom) driven by impending large investment in infrastructure and industrial activity. India is among leading global destinations for infrastructure and investment spending over the next decade. Sectors which have shown growth rates consistently over the last six quarters are Engineering, Banking, FMCG and IT. However, telecom continues to post its fifth consecutive quarter of earnings decline. We believe that the 2HFY11 will have changed growth pattern across sectors like Cement, Engineering, Real Estate, Infrastructure, Utilities reporting better earnings growth than they did in the past. Telecom will continue to post negative earnings growth for 2HFY11. As per MOSL estimates as given below, Engineering and Real Estate are poised to report better quarterly earnings growth in 2HFY11 at 31.8 per cent and 47.2 per cent against the 2Q10 estimates of 17.3 per cent and -1.5 per cent respectively. Infrastructure is also poised to grow at 37 per cent in 4Q10 against 2Q10 figures of 12.6 per cent; ditto with Utilities growing at 15.1 per cent against 8 per cent in 2Q10.

Also, the 2QFY11 earnings for MOSL universe (139 stocks) are more broad-based with 73 per cent of companies (v/s 70 per cent in June 2010) in a positive earnings growth trajectory and vice-versa.

Infrastructure Funds in India – Are they poised to grow?

Mutual Funds in India have been growing through rough patches but are poised to bounce back with a big-bang. The industry has several infrastructure funds to offer – as on Sept 30, there are 21 funds – it includes both open-ended and close-ended. Infrastructure Funds invest in stocks of companies which cover several sectors like petroleum and gas, utilities, real estate, engineering, FMCG etc. Unlike in other thematic funds, they are not restricted to a few sectors. On an average, they manage total assets of over Rs. 18,932 crore as on Sept 30, 2010.

From table 1, it can be seen that infrastructure funds have highest average allocation to Energy (24.64%) followed by Industrial Manufacturing (15.3%), Financial Services (14.92%), Construction (12.64%) and Metals (7.94%).

Performance – muted but poised to grow in future

Infrastructure Funds remained a mute spectator in the current Bull Run. In pre-crisis era, these funds had given a reasonable performance but it underperformed when compared to diversified fund category. As per table 2, it paralleled headline indices’ performance like Sensex and Nifty 50 in bull phase while it underperformed them in bear phase. However, in 5-year category, it outperformed all major categories except Bankex which gave an exception performance.

Among the largest infrastructure funds in terms of assets managed, ICICI Pru Infrastructure Fund, DSP BR TIGER Fund among others have outperformed major indices in 5-year category.

Conclusion

• Despite many hiccups including political unwillingness, infrastructure is sure to pick up in future which will augur well for various sectors like power, construction, engineering, energy, cement etc. It will also bode well for funds with these themes.

• Though riskier than diversified equity funds, investors with higher risk appetite can consider allocating 10-15 per cent of their portfolio to these funds.

• Investors must stick to good performing funds having less volatility and lesser concentration risk.



Source: MOSL