IDFC Mutual Fund is offering an open ended equity fund focused on Infrastructure theme from Feb 14 to Feb 28, 2011.
At a time when all Infrastructure funds are under-performing the equity diversified funds, I was skeptical of IDFC bringing on yet another Infrastructure fund. (Even though they should have been the first to launch, IDFC being a infrastructure development company!!)
But the contrarian rule of investing says, buy when others are selling that stock and sell when everybody is buying! So it might be an interesting thing to dig in deeper. Let’s go in.
Why Sector Funds Do Not Make Sense
It’s good to start with some skepticism. Stock market investing is a continuous process of finding new ideas and identifying future growth sectors.
But once a sector gets into mainstream discussions on TV/Print/etc, everyone rushes in to invest in that sector. So while everyone is buying into that sector, the valuations sky-rocket and newer entrants pay a heavy price for entering into that growth sector.
Street smart companies get into that sector and make money with the help of the investor frenzy as all companies in that sector get increasing good valuations.
So all this creates a sector bubble and all it takes is a prick!
What About Infrastructure Sector?
The infrastructure theme has been in the news for a good part of the last decade. India’s biggest bottleneck is infrastructure and India really needs this sector to grow and prosper. The India growth story will be built on Infrastructure.
With this in mind, a lot of Infrastructure funds came up and the demand for such stocks was very high. The valuations in 2007-08 went sky high. A lot of Real Estate companies took advantage of that bubble and were quoting at astronomical PE.
Meanwhile, while some of the business scaled in size it was at the cost of profitability. Few companies could match the balance sheet build up with commensurate profits. As a result scores of them report a virtual single digit return on their capital employed.
All this was further aggravated with the challenges that long term projects face – timely availability of cheap capital, execution delays, material availability and policy risks.
What is the Opportunity in Infrastructure?
The opportunity remains as significant as ever.
We are short on power capacity. Our current peak power demand is estimated at 190GW and given our projected growth we will need significantly higher generating capacity. The Chinese will deliver a generating capacity of well over 900GW into this year while the USA is slightly ahead of the Chinese.
In the roads we have one of the largest private public partnership programmes in the world.
Investment in ports by the private sector are dotting the coastline and a private port in the next couple of years with be amongst the top two in the country.
Airports, Metros etc are all assets that have been tendered out to the private sector.
What IDFC MF says :
We believe that infra sector will see return of profitability and sizeable reduction in balance sheet/debt by all companies operating in this space. With this high conviction idea we are doing a soft launch of our Infrastructure fund, the fund is designed to be ‘true-to-label’
Even though I started out skeptical of “yet another Infrastructure” fund and the risk of confining yourself to one sector which is prone to a bubble, I also see the merit of getting into infrastructure stocks/funds when the valuations are favorable and the growth prospects sounds good.
At a time when all Infrastructure funds are under-performing the equity diversified funds, I was skeptical of IDFC bringing on yet another Infrastructure fund. (Even though they should have been the first to launch, IDFC being a infrastructure development company!!)
But the contrarian rule of investing says, buy when others are selling that stock and sell when everybody is buying! So it might be an interesting thing to dig in deeper. Let’s go in.
Why Sector Funds Do Not Make Sense
It’s good to start with some skepticism. Stock market investing is a continuous process of finding new ideas and identifying future growth sectors.
But once a sector gets into mainstream discussions on TV/Print/etc, everyone rushes in to invest in that sector. So while everyone is buying into that sector, the valuations sky-rocket and newer entrants pay a heavy price for entering into that growth sector.
Street smart companies get into that sector and make money with the help of the investor frenzy as all companies in that sector get increasing good valuations.
So all this creates a sector bubble and all it takes is a prick!
What About Infrastructure Sector?
The infrastructure theme has been in the news for a good part of the last decade. India’s biggest bottleneck is infrastructure and India really needs this sector to grow and prosper. The India growth story will be built on Infrastructure.
With this in mind, a lot of Infrastructure funds came up and the demand for such stocks was very high. The valuations in 2007-08 went sky high. A lot of Real Estate companies took advantage of that bubble and were quoting at astronomical PE.
Meanwhile, while some of the business scaled in size it was at the cost of profitability. Few companies could match the balance sheet build up with commensurate profits. As a result scores of them report a virtual single digit return on their capital employed.
All this was further aggravated with the challenges that long term projects face – timely availability of cheap capital, execution delays, material availability and policy risks.
What is the Opportunity in Infrastructure?
The opportunity remains as significant as ever.
We are short on power capacity. Our current peak power demand is estimated at 190GW and given our projected growth we will need significantly higher generating capacity. The Chinese will deliver a generating capacity of well over 900GW into this year while the USA is slightly ahead of the Chinese.
In the roads we have one of the largest private public partnership programmes in the world.
Investment in ports by the private sector are dotting the coastline and a private port in the next couple of years with be amongst the top two in the country.
Airports, Metros etc are all assets that have been tendered out to the private sector.
What IDFC MF says :
We believe that infra sector will see return of profitability and sizeable reduction in balance sheet/debt by all companies operating in this space. With this high conviction idea we are doing a soft launch of our Infrastructure fund, the fund is designed to be ‘true-to-label’
Even though I started out skeptical of “yet another Infrastructure” fund and the risk of confining yourself to one sector which is prone to a bubble, I also see the merit of getting into infrastructure stocks/funds when the valuations are favorable and the growth prospects sounds good.
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