After gaining nearly 15.0% in the last couple of months (i.e. January 2012 and February 2012), the month of March 2012 has been rather gruelling for the Indian equity markets (as the BSE Sensex has moved side ways and delivered a negative return of 2.6%).
The newsflash from Euro zone, U.S., China and even the domestic events (such as 4th quarter mid review of RBI monetary policy, economic survey 2011-12 and the Union Budget) have all had their bearing on the Indian Equities. But during these tough times, the market have offlate received some respite from the inflation data as it is now expected to moderate and remain stable in the next financial year. This may prompt the Reserve Bank of India (RBI) to consider a policy rate cut from the next monetary policy review meeting (scheduled on April 14, 2012), which may provide a fillip to investment activity and be postive for interest senstive sectors. In fact, with the expectation of a rate cut buzzing around, infrastructure theme (which is interest sensitive in nature) has peformed a lot better than the borader market - the BSE Sensex in last few months; as the central bank has expressed to be considerate about growth. Thus now those who have suffered severly by investing in infrastructure funds at the peak of last investment cycle in 2007, may find exit opportunities in the intermediate future as interest senstive sectors are likely to perform better.
A Flash Back ...
As per the data released by The World Bank; Indian economy was worth USD 510 billion in 2002 which blossomed into a rapidly growing economy which stood at USD 950 billion in 2006. On the onset of 11th five year plan (2007-2012); India was estimated to grow at about 9.0% p.a. Deficient infrastructure was identified as a possible impediment in India’s growth Story. Till 2004, India managed to build only 1.8 Km of new roads a day. Power transmission losses were as high as 48% in some states. With such poor infrastructure, achieving 9.0% growth was rather an ambitious target. Massive investments were proposed in infrastructure.
(Source: Planning Commission Data, PersonalFN Research)
Private sector plays an important role in the economic development of a country. To reduce bottlenecks in infrastructure development, private sector investment was encouraged. Fixed capital formation is an indicator of business confidence and expectation of future economic trends. As seen in the graph Gross Capital Formation of pvt. Corporate sector picked in 2007-08. However, market was expecting a repetitive performance year after year. Have a look at the graph given below.
Performance of CNX Infrastructure
(Source: BSE India, NSE India, PersonalFN Research)
The above graph reveals that if you had invested a sum of Rs 100 in the CNX infrastructure index on August 01, 2005 your money would have appreciated to Rs 365 as on December 31, 2007, whereas a similar investment in BSE 200 index would have more than doubled – yielding you Rs 270 and that in S&P CNX Nifty Rs265.
Trends in AUM of Select Mutual Fund Schemes
(Source: ACE MF, PersonalFN Research)
Robust capex plans of the pvt corporate sector, success of infrastructure theme in the stock market lured investors to invest aggressively in the thematic infrastructure funds. From Assets Under Management (AUM) of Rs 277 crore in March 2005 in case of DSPBR India T.I.G.E.R fund, it grew to Rs 1,436 crore by March 2007. Similarly, assets of UTI Infrastructure went up five times. Although such a mammoth growth was partially due to the appreciation in the value of assets, the flow of fresh investments in our view cannot be underestimated as well. Some fund houses couldn’t grow their assets as rapidly as their competitors could, but that did not preclude them from launching similar (i.e. infrastructure) schemes to garner fresh investments.
Performance of Infrastructure Funds vis-à-vis Multi/Flexi/Opportunities style funds?
|
3-Yr CAGR |
5-Yr CAGR |
Std. Dev |
Sharpe Ratio |
| Category Average Infrastructure Funds |
18.8 |
5.8 |
7.85 |
0.07 |
| Category Average of Multi/Flexi/Opportunities Funds |
27.5 |
8.7 |
7.43 |
0.25 |
| BSE-200 |
25.0 |
6.4 |
8.14 |
0.22 |
| CNX Infrastructure |
3.3 |
-4.1 |
9.24 |
0.02 |
| S&P CNX Nifty |
21.5 |
6.4 |
8.10 |
0.21 |
(NAV data as on March 23, 2012. Standard Deviation and Sharpe ratio is calculated over a 3-Yr period. Risk-free rate is assumed to be 6.37%)
(Source: ACE MF, PersonalFN Research)
But indeed late entrants ended up generating poor returns on their investments. Have a look at the table given above. Over a 3-Yr and 5-Yr period, average returns in the infrastructure funds category have faltered vis-à-vis those generated by flexi cap, multi-cap and opportunities funds collectively. In fact when assessed on the risk-adjusted return basis, infrastructure funds look even more miserable.
How the last one year has been for Infrastructure Sector?
In the past 1 year CNX infrastructure has outpaced BSE-200 only twice on monthly returns basis (i.e. in June 2011 and January 2012). This clearly indicates that investors have given a cold shoulder to infra stocks in the recent past. Growth in factory output as captured in IIP data has been fragile and inconsistent. Policy paralysis of government, bottlenecks in funding and high interest rate scenario has been delaying the revival of corporate capex cycle.
Month-on –Month Returns (F.Y. 2011-2012)
(Source: ACE MF, PersonalFN Research)
Road Ahead...
The 12th five year plan which aims 9.0%-9.5% growth, will come into effect from April 1, 2012. To achieve this growth rate; heavy investment of around 45 lac crore needs to be done in sectors such as electricity, roads and bridges, telecommunications, railways and irrigation to name a few. Considering the limitations on government’s ability to provide higher budgetary support; investment from the private sector in infrastructure has to rise more than the proportional outlay by the public sector. Public Private Partnership (PPP) in infrastructure would hold the key going forward. Government may encourage households to direct their savings to infrastructure by incentivising investment in infrastructure bonds. It may also expedite the process of pension and insurance reforms which are also aimed at channelizing household savings to infrastructure investments. The Finance Ministry has announced guidelines for establishing infrastructure debt funds. Lately, LIC, Bank of Baroda, ICICI Bank and Citycorp Finance India which have, in joint venture, set India’s first Infrastructure debt fund with an initial capital of USD 2 billion.
Our view
We believe that investment cycle has bottomed out and any rate cut by RBI will eventually reduce the cost of borrowing which in turn may help companies to chalk out capex plans. Furthermore, initiatives such as infrastructure debt funds would attract investment in infrastructure in a big way. Lately, government has been working on taking out the bottlenecks in the resources such as availability of coal to power generation companies. It has directed Coal India to sign long term fuel supply agreements with power generation companies.
However, it is noteworthy that we are entering a new capex cycle with higher fiscal deficit (5.9% for F.Y. 2011-2012). Rupee has been struggling to remain firm against dollar. Higher crude oil prices in the international market may discourage RBI from cutting policy rates aggressively as higher crude oil prices may result in higher inflation.
Clearly, it’s going to be a bumpy ride for the infrastructure companies and thus taking exposure to these companies via infrastructure funds would not be a prudent investment idea. Sure, some companies belonging to infrastructure space may do exceedingly well, but you do not need infrastructure centric funds to benefit in turnaround phase of infra theme. Flexi cap/mutli-cap or opportunities funds would help you benefit from opportunities available in infrastructure space as well. We believe that any rebound going forward, would give investors opportunities to exit from infrastructure funds.
If you are curious to know, whether you should commit fresh money to infrastructure funds you would have to time both entry and the exit which may turn out to be a difficult task if you aren’t well-versed with the systemic factors of a respective industry Thus in such time opportunities funds would come handy. Here too, success would depend on the quality fund of management and how you select such winning mutual funds.
This article was written exclusively for Equitymaster, India's leading Independent research initiative. Trusted by over a million members all over the world, Equitymaster is known for its well-researched, unbiased and honest opinions on the Indian Stock Market.
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