VR Logo

Betting on infrastructure

As we write this, fears are mounting

As we write this, fears are mounting that India may not be ready for the Commonwealth Games, reflecting the slow pace of the country's infrastructure development. India had initially promised to hand over the venues to the organisers by December 31, 2009. But targets have consistently been missed.

This is just a minor reflection of the poor state of affairs where India's overall infrastructure is concerned. There's no denying that infrastructure, or rather the lack of it, is the biggest bottleneck for improving India's march towards matching China's growth, the world's fastest growing economy. Globally, India ranks low on the quality of its infrastructure. In fact, it ranks even below war-ravaged Ivory Coast on this parameter. Blame it on the bureaucracy, red tape and difficulty in acquiring land.

Experts estimate that the country's poor infrastructure shaves an estimated 1-2 percentage points off India's annual economic growth. Prime Minister Manmohan Singh's ambitious target of 10 per cent economic growth has prompted the government to announce the setting up of a Rs 50,000 crore ($11 billion) fund to build roads, ports and bridges to drive economic growth. The basic premise of the proposed fund is to facilitate adequate and smooth funding for the sector. Considering that India's underdeveloped bond market - with limited funding options from a long-term perspective - has restricted the flow of funds to this sector, this is a step in the right direction.

A good start, but insufficient. Much more needs to be done.

India spent 6.5 per cent of its gross domestic product (GDP) in 2009 on infrastructure. Though we are way behind China in infrastructure spend (the corresponding figure for China in 2009 was 11%), it still comprises a significant amount. In the last Budget, the finance minister allocated nearly 46 per cent (Rs 1,73,552 crore) of the total planned expenditure to the infrastructure sector. The government has pegged infrastructure investment at 7.5 per cent (2009-10), 7.94 per cent (2010-11) and 8.37 per cent (2011-12) of GDP.

So what does this mean for you as an investor? Should you bet on this sector? With the amount of money slated to go into it, why not?

Is there money to be made?
Where thematic funds are concerned, the most popular of the lot has been infrastructure. As of now, the amount of money in infrastructure funds is Rs 14,133 crore (May 31, 2010), distributed amongst 20 schemes. In fact, the assets of open-ended infrastructure funds account for over 10 per cent of the total assets of equity diversified funds.

Unfortunately, this category of funds is out of favour right now with investors simply because it has not been able to race ahead in the latest bull rally that started in March 2009. The average return delivered by infrastructure funds was 79 per cent while that of equity diversified funds was 84 per cent. A fundamental reason could be the high exposure to Energy which was one of the top sectors of almost all the infrastructure funds in 2009. In terms of performance, BSE Oil and Gas (73%) and BSE Power (74%) could not hold a candle to BSE Metals (234%), BSE Auto (204%) and BSE IT (132.78%). But one cannot have a myopic view when investing in such a theme and investors must be willing to ride the highs and lows. These funds have rewarded their investors quite well. During the previous bull run (June 15, 2006 to January 8, 2008), the average absolute return from this category was 89 per cent, as against 69 per cent from the equity diversified category (equity diversified funds excluding thematic infrastructure funds).

Surprisingly, they did not fall too hard in the bear phase that followed. Relatively speaking, the average fall of 58 per cent during the meltdown of 2008 was not dramatically severe (diversified equity: -55%). The worst performer was JM HI FI (-72%) while the best performer was ICICI Prudential Infrastructure (-52%).

Understanding the theme
Infrastructure is a very loosely defined term. The government has its own definition of which sectors comprise this theme, so does the Income Tax Department, the Reserve Bank of India (RBI) and the Insurance Regulatory and Development Authority (IRDA). Even amongst fund managers there is no consensus.

Some will include Financials, others will include Pharma (hospitals, healthcare) and still others include social infrastructure (education, hotels) under its broad purview. In fact, apart from FMCG, Textiles and Technology, virtually all sectors can find their way into an infrastructure fund. If we go by such a broad mandate, almost 69 per cent of the Sensex would be classified as being eligible for investment in such a fund.

What's on offer?
The pioneer of the theme was UTI Mutual Fund which came out with the first infrastructure fund - UTI Infrastructure - in April 2004. Surprisingly, it was not at all well received. It garnered just Rs 62 crore during its launch. In December that year Tata Mutual Fund came out with its infrastructure fund and collected a respectable Rs 760 crore. That paled in comparison to the Rs 1,398 crore that ICICI Prudential Infrastructure garnered during its launch in 2005. Then along came Reliance Infrastructure in 2009 and mopped up Rs 2,350 crore.

The year 2007 was a stellar one in the history of infrastructure funds. On an average, infrastructure funds delivered 81 per cent (equity diversified: 58%). But ICICI Prudential Infrastructure stood head and shoulders over the rest when it delivered 93 per cent. Investors flocked to the fund which saw its assets grow by 177 per cent that year. In fact, 2007 was the year in which the most number of infrastructure schemes were launched. Of the 9 schemes launched, 8 were closed-end with Taurus Infrastructure being the only open-ended scheme.

The fund house that has brazenly capitalised on this theme to garner more assets under management (AUM) is Tata Mutual Fund. Besides Tata Infrastructure (2004), it offers Tata Growing Economies Infrastructure Plan A (2008) which has a global tilt, Tata Growing Economies Infrastructure Plan B (2008) which will focus on India and emerging economies and Tata Infrastructure Tax Saving (2009), which is an equity linked savings scheme (ELSS).

This category has flourished to now include 21 open-ended infrastructure funds, including Baroda Pioneer Infrastructure, the latest addition to this fraternity. However, being a rather new theme, only 9 funds have a history of at least three years. From these, we narrowed down on four from which you can take your pick.

Though Sahara Infrastructure has performed well, we have not recommended it because of its size, which is less than Rs 10 crore. Should the size drop even further it could hinder the performance of the fund. The selection of UTI Infrastructure may surprise some, but it deserves to be selected simply because it is the only fund that sticks meticulously to the theme. The other selected picks are Canara Robeco Infrastructure, ICICI Prudential Infrastructure and Tata Infrastructure.