On the FAST TRACK

If the Indian economy has to keep growing at 8-9 per cent a year, or try to get up to 10 per cent, it has to get its infrastructure in order quickly.

If the Indian economy has to keep growing at 8-9 per cent a year, even try to scale up to 10 per cent, it has to get its infrastructure — roads, power, telecom, ports, airports and rail — in order quickly. If the government and companies are going to invest big money building that infrastructure, the companies that build these superstructures, and the companies that supply goods and services to the builders, are in for a period of heady growth. If the revenues and profits of such companies grow, so should their share prices.

That’s the central premise of infrastructure funds, which

are steadily increasing in number — eight schemes are there, two more are in the new fund offer (NFO) stage. It’s a powerful investment idea, one whose time might have come.

The story
Sceptics, even rationalists, might cite history, and question the figures blown up in the last column that indicate the quantum of investments needed in six key infrastructure sectors. When it has come to making, or enabling, investments in places that matter, investments have fallen woefully short of needs. So, what’s changed?

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For one, the economic need and logic is greater than ever before. There is greater realisation and intent among policymakers and entrepreneurs that infrastructure holds the key to the sustaining India’s economic boom. The government has outlined Rs 14,50,000 crore towards infrastructure in the eleventh five-year plan (2007-12) alone. Says Ved Prakash Chaturvedi, managing director, Tata Mutual Fund: “Infrastructure can’t be imported, it has to be built.”

Many more are coming forward to build it and fund it. Proof is the swelling order books of companies involved in this building. Proof is the ever-increasing prices of essential inputs like cement and steel. Proof is the nine ultra-mega power projects the government is trying to push through and the scores of Metro links coming up in major cities. Proof the rash of venture capital funds launched or announced by financial services companies. Says Sanjay Sinha, chief investment officer, SBI Mutual Fund: “Public-private partnership is increasing. There are many more companies participating in this area, which was earlier the preserve of the public sector.”

For businesses that are tied to this infrastructure story, wholly or partly, this is a golden period. Says Chaturvedi: “Overall earnings growth in the next year will be about 17 per cent. By comparison, infrastructure should grow at over 25 per cent.” Further, say analysts, that mark-up in earnings is likely to continue for the next five to 10 years at least. Says Chaturvedi: “Earnings growth for companies operating in the segment should continue for the next decade at least.”

The profiteers
As an investor, you should be looking to ride this surge in economic activity. While most diversified equity funds have a healthy holding of infrastructure-related companies, dedicated infrastructure funds also make for worthy investments. Although these are thematic funds, they are more broad-based than most of their peers. There are builders (for instance, construction, power companies and telecom companies) and there are suppliers (engineering, capital goods, cement, steel, banks). That broad domain brings them in the investment set of more investors.

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At present, there are 10 infrastructure funds. Of this, only one scheme, Tata Infrastructure, has completed three years. Six others have completed a year, and their performance over this period is outstanding, beating the benchmark by 14-22 percentage points (See table: Your options in…).

The strategy
It mirrors the Building India story unfolding, and you should get a piece of it through these infrastructure funds. But only a piece. Such investment themes, even if they are broad-based should not be the core holding of your portfolio. Rather, only a portion of your portfolio should go there. Says Sinha: “One can invest 25-30 per cent of your equity allocation to infrastructure funds, given its attractiveness today and growth prospects.”

Pune-based financial planner Veer Sardesai advises a lower allocation and insists on a long-term horizon. “Invest about 20 per cent of your portfolio in infrastructure funds, for a minimum five years. That’s because most of the infrastructure story will play out in the next five to 10 years.”

Targets set by the government might still not be met, especially in sectors where the slow progress on policy changes is holding back investments. If telecom, where private players have the freedom to direct traffic, is a good example of how things should be, power and ports are crying for government attention on a priority basis.

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Says financial planner Veer Sardesai: “The story is more of growth, than value. Faster growth will come from government investing in infrastructure and more private participation, with an increasing number of listed companies.”

In the months to come, you might have another

option in the form of dedicated infrastructure funds. These are closed-end funds that will invest in companies in the infrastructure space, both listed and unlisted, and also offer additional tax breaks (See box: Infrastructure funds: Act II). India is building, and you can build on it.

The bill to build India
This is what the Deepak Parekh Committee on Infrastructure Financing estimates is needed. Dollar figures have been converted into rupees at Rs 40/dollar
Total
Rs 19,00,000 cr
over next 5 years
Power
Rs 8,00,000 cr
over next 7 years
Roads
Rs 2,00,000 cr
over next 5 years
Telecom
Rs 88,000 cr
Ports
Rs 72,000 cr
over next 7 years
Airports
Rs 36,000 cr
over next 5 years
Rail
Rs 20,000 cr