With talks of an ambitious amount of US$1 trillion being allocated for infrastructure development in the twelfth five-year plan, the infrastructure sector seems to hold great promise for the long term. Increases in the budgetary expenditures targeted for the sector over the past years have paved the path for better roads and improved power supply albeit with limited success. This year the government has provided another Rs. 20,000 of tax deduction to individual investors to support infrastructure financing. Nevertheless, the sector’s one year returns have lagged behind Automobiles, Information Technology and Metals.
In order to gain more insight into the sector, we interview Mr Sankaran Naren, the fund manager of ICICI Prudential Infrastructure Fund, which is featured in Recommended Funds section. “If there had been a complete withdrawal of fiscal stimulus, then we were looking at a change in strategy”, opines Mr Naren while talking about impact of Union Budget on the fund.
Key Points from the interview
The strong population growth and booming economy are generating enormous pressures to modernise and expand India’s infrastructure
Overweight on Telecom and regulated power having substantial operating power plants
Short-term outlook for Power sector is positive
Large–cap bias and derivatives have contributed to fund’s outperformance
Dhanashri Rane (DR): As of 31 December 2009, the fund has outperformed its peers. What are some of the factors that have contributed to the fund’s performance?
Sankaren Naren (SN): The fund has been maintaining a large-cap bias over the last two years and the same has contributed to the fund’s performance. In addition, we have used derivatives exposure to tide over volatility and the same has worked in favour of the fund.
DR: Would there be a change in the investment strategy of the fund post the budget? If so then why?
SN: No, however if there had been a complete withdrawal of fiscal stimulus, then we were looking at a change in strategy.
DR: According to you, what is the expected amount of investment into the infrastructure space in the coming decade? How much of it will be raised from the capital markets?
SN: Ramping up investments in infrastructure is critical for India’s growth, and its sustainability. Supporting infrastructure investment is particularly important at this time, not just to sustain total domestic demand at a time of global crisis, but also to lay the foundations for stronger economic growth in the future. The strong population growth in India and its booming economy are generating enormous pressures to modernise and expand India’s infrastructure. The creation of world-class infrastructure would require large investments in addressing the deficit in quality and quantity. The very fact that the government in the Eleventh five-year plan (FY 2007-12) estimates that investments to the tune of US$492 billion are needed during the five-year period is a mere indication of the likely investments that would follow over the coming decade.
DR: Within the infrastructure space, which are your favourite sectors? Why?
SN: Within the infrastructure space, we maintain a positive bias towards sectors such as Telecom and regulated power having substantial operating power plants.
DR: With many new entrants in the power generation sector and the power sector being very capital intensive while also requiring long gestation periods, do you think the power generation sector is getting overcrowded?
SN: We believe that merchant power prices are likely to go down only over a period of time. Consequently, the short-term outlook is positive for the sector. Power is a basic necessity that is in shortage in India.
DR: Even though the focus of the government has been on the infrastructure sector, the corporate results for companies haven’t been encouraging due to execution issues. What is your outlook for the sector and do you see the earnings growth improving?
SN: In some cases like construction, execution issues have been a problem. In our view, the same is likely to happen as execution of projects would be subsequent to necessary approvals. That being said, we believe that funding constraints would come down with the complete withdrawal of stimulus.
DR: Can you give us an example of an investment decision that turned out well and one that didn’t do so well?
SN: The decision to stay out of the booming real estate sector in 2007 and the decision to cut our exposure to mid-cap turned out to be a good decision as the same contributed to the fund’s performance. On the other side, our conservative approach during March 2009 to May2009 has hurt the fund.
About ICICI Prudential Infrastructure Fund
Mr Sankar Naren has been managing this fund since October 2005 and has over 20 years of experience. Apart from this fund, he manages ICICI Prudential Tax Plan, ICICI Prudential Indo Asia Equity Fund (jointly with Mr Rajat Chandak), ICICI Prudential Growth Plan, ICICI Prudential Discovery Fund and ICICI Prudential Dynamic Plan.
Investment in infrastructure by government typically includes projects involving highways, railways, ports, airports, telecom and power. As indicated by the Index of Industrial Production, the growth of six core infrastructure industries of crude, petroleum refinery products, coal, electricity, cement and finished steel has picked up very well since the lows of October 2008. Chart 1 gives the top ten sectors in percentage where this fund has invested in. Led by Power, Banks, Oil and Petroleum products do share prominence in the fund’s portfolio.
For this fund, the risk ratios are as follows -
- Sharpe Ratio: 0.61
- Portfolio Beta: 0.97
- Annual Portfolio Turnover: 1.26 times
- Annualised standard deviation: 34.42%
source: ICICI Prudential Factsheet, February 2010
This fund has been a top performing fund in the infrastructure space over a five-year time horizon beating the benchmark S&P CNX Nifty and BSE Sensex. Chart 2 shows the comparison of the fund with indices. Investors may even compare the performance with other funds from the same fund class using the tool Chart Centre.
Since infrastructure projects require huge capital and have long gestation periods, identifying the right companies which are fairly valued and have attractive order books may not be an easy task for ordinary investors. Hence, retail investors can consider sector funds if they are keen on having an exposure to this sector which undoubtedly has good potential.