Tightrope walk for infra investors

Should you ignore the recent rise in these stocks and funds or invest more? Experts suggest investors tread carefully

It’s tough to ignore funds or stocks that have given 25 per cent or more annualised returns in six months. Especially if these are infrastructure funds, as any revival in the economy’s fortunes will improve their prospects substantially. Yet, retail investors would be better off if they didn’t increase their exposure substantially to this sector, for a number of reasons, say investment experts. Says Vidya Bala, head of mutual fund research at FundsIndia.com: “Infrastructure and allied sectors have run up in anticipation of post-election reforms. Also, the valuations of many were cheap compared with more expensive sectors such as information technology, pharmaceuticals or fast moving consumer goods.”

In other words, this rally seems to be based more on an event rather than fundamentals, a clear signal for retail investors to be careful.Hemant Rustagi, chief executive officer (CEO) of Wise Investors, says: “At present, the rally is based on a stable government, economic revival, lower interest rates and many other factors. No one can be sure how many of these will be achieved and at the same time. Even if reforms take place, infra projects have a long gestation.”

That is, too many ifs and buts are involved. Third, and important, the valuations of many of these stocks have run up substantially without any fundamental reason. While the price-to-earnings (PE) multiple of the BSE-100 index is at 17.80, that of the CNX Infrastructure index is at 19.13, as on last Friday. At the beginning of this year (January 1), the CNX Infrastructure index PE was 17.26, and is up 10.8 per cent this year. Infra stocks are sitting on higher PEs — Larsen & Toubro’s is 28, Crompton Greaves’ 53 and JP Associates’ 32. Now, even if things improve for the infra companies, one big issue with them is the loan on their books. If they raise fresh capital, it will lead to earnings dilution and might not boost growth in the short to medium term. “Given the limited basket of quality companies to choose from in this space, we are of the opinion that one can play the theme without having to take exposure in infra funds,” adds Bala.

Of course, the sector has potential. Vikaas Sachdeva, CEO, Edelweiss MF, says infrastructure could probably perform if the new government brings in good policy measures.

So, what should you do? Some experts feel if the stocks or funds have run up substantially, as in 20 per cent or more, it could be a good time to book a profit. If things start improving, one can always re-enter. Otherwise, participate through thematic schemes. There are many which invest in stocks that support the infra theme. For instance, there could be a scheme that invests in banking or other allied stocks, suggests Vishal Dhawan of Plan Ahead Wealth Advisors. Or, you could even look at a diversified mid-cap fund that is bullish on the infra theme. On a standalone basis, have only 10-15 per cent in any particular sector.

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