Premium
This is an archive article published on May 3, 2010

‘There is a need to improve debt flows into infrastructure’

The government and the Reserve Bank of India have recently announced a number of measures to develop and support the infrastructure sector in the country.

The government and the Reserve Bank of India have recently announced a number of measures to develop and support the infrastructure sector in the country. As the supply outstrips the demand in infrastructure,the sector is poised for an upside. S Naren,chief investment officer at the ICICI Prudential AMC,shares his view with Niti Kiran on the outlook for the sector and infrastructure funds. Excerpts:

After RBI’s announcement in the recent credit policy,more bank credit is expected to flow into the infrastructure sector. What are your views about the long-term prospects of this sector?

The measures taken to boost infrastructure investments in the annual credit policy will surely contribute to infrastructure development and accelerate growth. These steps are clearly expected to boost private participation in infrastructure projects,which is crucial for sustaining long-term growth. However,equity for infrastructure development was already present in the system. The concerns were on the debt funding side and the execution and speedy delivery. On the debt side,the government’s decision to allow IIFCL in consultation with banks for take-out financing is a positive step. This will effectively address the asset-liability mismatch of commercial banks arising out of financing infrastructure projects.

Story continues below this ad

The infrastructure opportunity in India is a multi-decadal opportunity. Over the long term,this sector is pertinent to the country’s growth and therein lays the potential. Given the large demand for infrastructure,the scope of growth of this sector continues unabated. We believe that this sector is a good investment option with a long-term view given that it is expected to benefit due to the stimulus withdrawal,which could lead to incremental spending by the government. Also,the sector being a cyclical one,is currently,positioned for an upside.

What has held back infrastructure development in the country? Is the cause a lack of capital,or are there other issues?

There has been good amount of capital in the infrastructure space since 2006. The problem,however,has been on the execution front and actual implementation,which has been very slow across sectors. To address such bottlenecks,we have to make sure that execution of infrastructure projects is streamlined with regular monitoring and benchmarking. There are some indications of this happening. For instance,the road sector has implemented various checks and provided a framework to improve and ensure speedy execution. This needs to be replicated across other areas like ports and power.

One major concerns in this sector is the lack of long-term debt with tenures comparable to the concession periods. Are there any solutions to this problem?

Story continues below this ad

It is true that long-term debt with high tenures has been costly. However,equity markets in the near term have been very attractive and investors have been raising equity. However,equity market cannot be the only vehicle for infrastructure financing and there is a need to improve debt flows into infrastructure as well. The government is clearly aware of the fact and has,therefore,already put in place initiatives like take-out financing to address debt investments.

Other uncertainties in the infrastructure sector are delays in obtaining environment clearances and delay in equipment supplies that lead to assets becoming substandard. Your take on this?

Being a democracy and given the importance of understanding environmental issues,clearances are important and cannot be compromised. However,there is a need to ensure that policy bottlenecks and red tapism do not form a part of delays. Also,Indian equipment and assets are definitely of good quality,specifically given the high-capacity utilisation of Indian infrastructure assets.

Currently,how strong is retail participation in infrastructure funds? Is it expected to grow in the light of the recent announcement?

Story continues below this ad

Retail participation in infrastructure funds was much higher in 2007 when the sector valuations were very high. Today,when the sector valuations are much lower,investors are looking at short-term past performance and not actively participating. On the contrary,investors should look at long term and capitalise on the current opportunity provided by the sector through attractive valuations and strong growth prospects. They should consider investing in infrastructure funds through staggered investments.

Thematic funds (such as infrastructure) do cause concentration risks. How should investors deal with this issue?

Thematic funds can be a part of an investor’s portfolio to increase the return potential. However,theme funds are cyclical in nature and investors should take a futuristic view. Investors are better positioned to gain out of investing in thematic funds as they invest after an underperformance and are well positioned to capture the upside. Currently,infrastructure offers a good investment option. It has underperformed over the last two years and is now set to gain from the increased focus by the government. Also theme funds are more diversified in nature.

Have the global uncertainties declined or do they remain high?

Story continues below this ad

Global uncertainties have not declined. However,in our opinion Indian growth is a lot more dependent on how the Indian economy works and how we are able to sustain the growth. While the domestic financial markets are interlinked with the international markets,the linkage of the Indian economy with the international economy is limited. For instance in 2008,when the global economies received major setbacks,the India economy continued to grow at around 6 per cent. While there will be impact on some sectors,at a broader level the Indian economy is more driven by domestic consumption sentiment,demand growth and infrastructure support. Any international problems will not derail the India story. Hence,supply creation through infrastructure growth and developmental focus will be important plays for growth sustenance.

How do you expect India Inc to perform in Q4FY10? Which sectors are likely to perform better?

We expect Q4 FY10 to be very good. The corporate sector profits across the board (ex oil marketing companies) will be positive and are expected to be one of the best in recent times on the back of demand growth and more stable domestic environment.

Any sectors that investors should keep away from for the time being?

Story continues below this ad

Oil marketing sector is one sector where we would be careful on investments given the increase in subsidy costs and the limitation of the companies to pass through the prices to the customers. Also,we believe that consumption sectors based on interest rates and borrowing will require a cautious approach given the incrementally increasing interest rate environment.

Latest Comment
Post Comment
Read Comments
Advertisement
Advertisement
Advertisement
Advertisement