Infra funds' performance will hinge on revival in private capex: Experts

Infrastructure (infra) funds, which have underperformed for over a decade, have enjoyed a good run in the recent past. These funds are up 75.9 per cent on an average over the past nine months, compared with the Nifty’s 67.2 per cent.

Allocation to cyclicals helped

After the March 2020 market crash, all the major economies, including India, launched large monetary and fiscal stimulus packages to counter the slowdown. These measures convin­ced the market that both the economy and corporate earnings would witness a V-shaped recovery. During phases of recovery, cyclical sectors witness more pronounced growth in earnings. Many investors, therefore, tilted their portfolios towards these sectors.

“Infra funds have a higher allocation to cyclical-oriented sectors like construction, cement, and capital goods, compared with other fund categories. This helped the net asset value (NAV) of these funds appreciate over the past six months,” says Sanjay Dongre, executive vice-president and fund manager, UTI Asset Management Company (AMC).  

The Budget, too, provided a boost. “A 35 per cent increase in infrastructure capex outlay for FY22 in the Union Budget allayed the Street’s concerns regarding the government’s ability to finance infrastructure spending,” says Abhinav H Sharma, assistant fund manager, Tata Mutual Fund. In the third quarter of FY21, most companies in this sector reported better-than-expected earnings and order flows.

Outlook positive

This sector should do well after a prolonged spell of underperformance, going by the law of mean reversion. “As government spending on infrastructure materialises in terms of building road, railways, etc, construction companies and infrastructure asset owners stand to benefit,” says Ihab Dalwai, fund manager, ICICI Prude­ntial Infrastructure Fund.

Private capex, which has been low for a considerable period, may revive. “This may happen due to government initiatives like PLI (production-linked incentive) schemes, low interest rates, and increasing capacity utilisation across various user industries,” says Sharma. 

According to Dongre, early normalisation of demand is expected to benefit the cement sector, gasification of the economy will be positive for firms in the gas supply chain, and with only three players left in the telecom sector, tariff increases are expected to result in higher cash flow generation for these companies.

Sharma feels the medium- to long-term outlook for the sector is positive because of the likely upturn in the domestic capex cycle and reasonable valuations.  

Watch out for risks

Infra funds’ prospects could be dented if the anticipated revival in domestic capex doesn’t materialise. The nature of these businesses also poses a risk. Says Ankur Kapur, managing partner, Plutus Capital: “Infrastructure companies are capital intensive. Many of them tend to have a low return on investment (RoI).” Higher interest rates affect their profitability.

An infra fund is a sector fund, and periods of high and low performance alternate in all sectors. When the sector is performing poorly, the fund manager doesn’t have the leeway to exit and invest in a better-performing sector.  

Should you invest?   

Investors with low risk appetite may give these funds a miss. “If there are high-quality companies within the infra sector, the fund manager of your diversified fund will anyway include them in his portfolio,” says Kapur.

Dalwai says that given the positive outlook for the sector, there is a case for savvy investors to take a bet.

Only investors with a high risk appetite should enter these funds, and that too with at least a 7-10-year investment horizon. Exposure to a single sector fund should not exceed 5 per cent of the equity portfolio.