Give infra push to your portfolio

While picking mutual funds, go for ones with at least 85% exposure to these stocks

The Nifty Infra index has delivered a return of 32 per cent year-to-date and 25.11 per cent over the past one year, outperforming the Nifty 50, whose corresponding figures are 26.61 per cent and 20.15 per cent, respectively. Infrastructure funds are currently the best-performing fund category, according to mutual fund tracker Value Research, with a one-year category average return of 29.70 per cent. For the past two-three years, the government has been trying to improve the investment climate in the country by removing the bottlenecks impeding both ordering and execution of projects. In the absence of private capex, it has been doing all the heavy lifting, through spending on roads, railways and power. Other areas of focus include rural electrification, urban infra projects like Metro, and affordable housing. 

Road construction is a clear beneficiary of the government’s initiatives. The speed of road construction has gone up from less than 7 km a day three years ago to around 23 km per day. “The ordering model has moved to EPC contracts and hybrid annuity model, thereby bringing down the capital requirements of developers,” says S Krishna Kumar, chief investment officer-equity, Sundaram Mutual Fund. 

Tendering in the infrastructure sector, which was of the order of Rs 1.5-2 lakh crore in 2012-14, had risen to Rs 7 lakh crore last year. In the first half of this year also, projects worth around Rs 3.5 lakh crore have been tendered. 

Last time the power sector was the biggest driver of capex in the country. Going by the tendering that is happening, the current revival is more broad-based. Roads and Railways are expected to contribute Rs 1 lakh crore of orders each this year. More than Rs 50,000 crore of orders is expected from affordable housing, while water supply and irrigation may account for Rs 25,000 crore each. Metro construction in cities like Delhi, Bengaluru, Kolkata, Mumbai, and Chennai will also result in heavy infra spending. “It is a very diversified order book in terms of spending and we are positive across all these sectors.” says Kumar.  

Moreover, companies are trying to reduce debt. “From 2014 onwards there has been a clear intent by companies to reduce the debt on their balance sheets. This will result in improved return on investment for construction companies,” says Devam Modi, director, Equirus Securities.

However, the entire infrastructure theme is not participating in the current rally. “Companies that are in highly capital intensive sectors, like power generation, ports, and airports, where not much capacity addition is happening currently, or companies that are highly leveraged are not participating in the ongoing rally,” says Ravi Gopalakrishnan, head–equity, Canara Robeco Mutual Fund. He is bullish on road construction, cement, transportation (including gas transportation) logistics (owing to organised players gaining at the expense of unorganised players post GST) and railways. Within power, experts are bullish on transmission and distribution, and not generation. 

The sector is not completely out of the woods yet. “Stressed working capital cycle, anaemic demand, high debt levels, and companies having difficulties in monetising their completed projects are some of the problems still dogging the sector,” says Ajay Bodke, CEO & chief portfolio manager (portfolio management services), Prabhudas Lilladher. Amar Ambani, partner and head of research, IIFL Wealth Management has this advice for investors: “Go for service provider companies and not asset-heavy companies. Players that are able to focus on profitability and control debt will do well. As an added safety net, look for high promoter holding of at least 45-50 per cent.” 

Those who don't want to pick stocks themselves may opt for infrastructure funds. Kumar suggests that investors should focus on funds that have invested 80-90 per cent of their corpus invested in the infra space, and not outside the theme.