Infra funds could gain from large budgetary allocation, say analysts

The finance minister announced a significant hike in capital expenditure (capex) in this year’s Union Budget. Infrastructure (infra) funds of mutual fund (MF) houses could gain significantly from the government’s plan to pursue an infra development-led growth model.

New cycle underway  

Fund managers believe this is a good time to enter infra funds. The capex budgetary estimate for 2022-23 is Rs 7.5 trillion - 24.6 per cent higher than the Revised Esti­mate of Rs 6.02 trillion for 2021-22. 

“The segment has been the beneficiary of aggressive budgetary allocation by the government. This has given construction companies good order book visibility and will help them scale up their operations,” says Ihab Dalwai, fund manager, ICICI Prudential Asset Management Company.

A new infra cycle may be in progress. “This cycle is coming after eight-nine years of subdued growth and is likely to last for at least four-five years. Infra companies are likely to clock higher growth during this phase and their stocks could also gain from multiple expansions,” says Sanjay Doshi, fund manager, Nippon India MF.

Several factors are contributing to the start of a new cycle.

“The growing formalisation of the economy has improved the government’s revenue potential,” says Doshi. This is allowing it to undertake capex, he adds.   

On the private-sector side, capacity utilisation has risen across several industries. “It has gone up to 70-85 per cent in many sectors. These are levels at which the private sector usually begins to put up new capacity,” says Doshi.

With stronger balance sheets and improving profitability, the private sector now has the heft to undertake new capex. He adds that infra companies are already reporting better order inflows.

According to Dalwai, sectors like power, telecommunications, logistics, real estate, and construction look attractive. “Competitive intensity has reduced across these sectors. The surviving companies will have substantial market share and better margin profile in the days to come,” he says.  

High-beta funds

Infra funds can be volatile.

“They tend to move a lot more, both on the upside and the downside, relative to the market and diversified equity funds,” says Kaustubh Belapurkar, director-manager research, Morningstar Investment Adviser India.

He said stock prices can at times run far ahead of fundamentals and the sector can also see prolonged downturns.

True-to-label fund

Look for a true-to-label infra fund. Since this theme can be very broadly defined, these funds can, in theory, invest in almost any stock.

“Financial services is already the largest constituent of your diversified equity funds. Hence, look for a fund that invests in core infra stocks,” says Belapurkar.

Doshi recommends investors look for funds that give a lot of importance to the balance sheet and corporate governance practices of companies in which they take sizeable exposure. He adds that the fund should also not have too much exposure to commodity businesses, which can prove to be a double-edged sword.

Limited, staggered exposure

Timing the performance of this sector is difficult.

“Due to the difficulty in timing, it is best to avoid individual stocks and take exposure via a fund,” observes Sonam Srivastava, Securities and Exchange Board of India-registered investment advisor and founder, Wright Research. She adds that with many diversified equity fund managers enhancing their exposure to the sector, investors at any rate will get exposure to infra.

“Fund managers will know when to exit these stocks. If you buy an infra fund, you or your advisor will be responsible for timing your exit,” she adds.

If you decide to take exposure to these funds, remember a few points. The sector has been doing well for some time. “Since these stocks have already run up in the recent past, enter these funds in a staggered manner and avoid oversized bets. Exposure to them should not exceed 5 per cent of your equity portfolio,” advises Belapurkar.

Investors need to be nimble.

“Once you have earned decent returns, consider booking some profit,” says Belapurkar.

Doshi says investors should enter these funds with a three-five-year horizon to get the benefit of an entire cycle.