Revival in investment cycle makes a case for more allocation to infra MFs

Mumbai: Explaining India’s economic structure requires a degree of specialisation qualifying for a Nobel in that discipline. But in the simplest of explainer articles for the man on the street, economists have often argued that consumption – and private capital investments – follow neatly sequenced cycles in this country. That explains why global commentators like Jeffries expect India to repeat the 2003-10 growth cycle now, with capital investments at the vanguard of the anticipated expansion.

A revival in the investment cycle would put the spotlight on ‘infra’. “For the first time in almost two decades, we see the right intent by the government to set right priorities on infrastructure spend, stable taxation, focus on asset monetisation and privatisation of state-owned companies,” said Charanjit Singh, fund manager, DSP Mutual Fund.

The sector has disappointed investors over the past decade as a relative straggler with respect to the broader markets, with the S&P BSE Infrastructure returning 12.74% over a 10-year period as against the S&P BSE 100 TRI return of 15.29%. After 2007, over-diversification by Engineering, Procurement, and Construction (EPC) companies, irrational bidding and increased leverage led to de-rating of infra companies.

During phases of slower growth and liquidity constraints, infra companies defaulted. This led to leaders becoming laggards.

Fund managers believe over the last decade, many companies have deleveraged and repaired balance sheets. Added to this, interest rates are at a two-decade low and will act as a catalyst for infrastructure spending. The government’s initiative on National Infrastructure pipeline provides long-term visibility on spending in key sectorsl. But this is expected to change. “Balance sheets are in good shape as they have deleveraged; execution is expected to improve and the number of projects has increased,” said Sachin Relekar, fund manager, IDFC Mutual Fund.

“Infra companies are now much leaner and focusing on execution, and less capital-intensive projects.”

Charanjit Singh expects companies in his portfolio to show a weighted average topline growth of 13.4% and 19.6% expansion in profits in 2023. He expects the weighted average ROCE to expand marginally from 16.5% in 2022 to 16.6% in 2023.

Given the sharp run-up in the markets over the last one year, Sachin recommends investors use a staggered approach to investing in such a theme spreading their bets over the next 12-18 months. “A clear intent outlined by the government to spend money has thrown up opportunities in the infrastructure space,” said Vijay Kuppa, Founder OroWealth. He advises investors to come with a 3-5 year perspective and his best picks are DSP T.I.G.E.R Fund and L&T Infra Fund.

Some believe investments in infra could do better than the broader market. “Given that a new capex cycle could kick off, earnings growth of infra companies could outpace the Nifty over a 3-5 year period,” said Anup Bhaiya, CEO, Money Honey Financial Services. He recommends IDFC Infra Fund and Invesco Infra Fund.