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Right time to invest in infra cos, says IDFC MF
Right time to invest in infra cos, says IDFC MF
IDFC has launched a pure play infrastructure fund called IDFC Infra Equity Fund. The company cites attractive valuation in the infra sector and a possibility of huge investment appreciation going ahead as the rationale behind launching the fund now.
mumbai,
MH,
India
(prbd.net)
18/02/2011
qAccording to Kumar now is the right time to invest in infrastructure companies as valuations are attractive. Infrastructure sector is likely to give higher earnings growth, he adds. However, he cautions that overleveraged companies will suffer from higher interest rates.
Meanwhile, Naren is underweight on midcap infrastructure on valuation concerns.
Below is a verbatim transcript of their interview with CNBC-TV18's Udayan Mukherjee and Mitali Mukherjee. Also watch the accompanying videos.
Q: Do you think it is a good time to launch an infrastructure fund, though interest is low, but valuations are good?
Kumar: Absolutely. I think you got to get a fund into the market when you see capital appreciation ahead of you. You have already had a big rally in 2008 in infra stocks, where you had some leading stocks at 45-60 PE. Today, they are all trading well below their long-term average PE ratios and you have visibility of earnings. So, hence we firmly believe this is a right time for infra.
Q: We have seen how infra has performed though in an interest rate tightening cycle and sometimes it is not just about where valuations have got in to. Are you confident that these companies can trend higher from here despite where rates may be headed or their interest costs may be?
Kumar: You got a valid point. This is an investment economy, so obviously rising interest rates will impact it. But on the other hand, in 2008, there were such significant equity capital raisings for infra stocks and for the last two years most banks had devoted incremental lending to infra that there is significant operating leverage that has been built up in the sector. So, you have seen very sharp equity price corrections because like I said, it was over headed sector. There was a lot of hype around infra. You had a number of infra companies listing, leading upto 2008. But today when I look at the sector, yes, there are some companies which are really over leveraged which will suffer from a rising interest in environment. But I am also seeing a number of other companies whose leveraged positions are far more stable.
You are seeing earnings growth because a number of infra projects, which were funded in the cycle of 2006-2010, are now beginning to come on stream. So, you are seeing revenues grow, and you are seeing revenues grow at much lower price earning multiples. It is very similar to what tech sector was in leading upto 2000. It was a discovery sector, you had nearly everybody launching a tech company and listing on the stock market. You had absurd valuations and you had a huge PE expansions. But if you looked at the sector in May 2003 onwards, that sectors never had a PE expansion thereafter. But the ground for earnings growth was set as India developed an outsourcing model. If you had invested in tech over the Nifty in 2003, tech has outperformed Nifty purely on the basis of the enhanced earnings growth that the sector went through rather than any PE expansions.
So, we are not saying that the infra sector is going to go through the same PE expansion that you saw leading upto 2008, in fact I would be very surprised if that would happen. But I am very confident that the infra sector will give higher earnings growth compared to the average of the Nifty over the next three-four years as infra projects come on stream. At this point of time, as markets are going through correction, without the related high price earnings multiples that some sectors in the Indian economy are still displaying.
Q: Coming on this discussion, we spoke about a month or two back and you were flagging off that infrastructure is a great space to get into. Subsequently, I think most stocks have corrected 25% in that space, if not more in the midcaps. It is becoming a matter of timing for a lot of people. What is the right time to get in because if you are early by a month, you could be entering may be at 25-30% higher prices than where you could have got in?
Naren: That is why in our fund we have had always a very largecap orientation because we believe that midcaps have to be bought at appropriate price points. We have had a very largecap buyers in our infrastructure fund. Our belief has always been that the midcaps will bottom out, when interest rate view changes and which is why we had been very underweight the midcaps. Instead the call that we took at that point of time to be overweight on sectors like metals have played out very well in the last two-three months.
Having said that, I do agree with you that investing in the midcaps in this space is something bit of a tight situation because these stocks tend to move in a very volatile manner. That is the reason a largecap fund is much better equipped to buy the midcaps as and when they fall rather than the midcap focused fund.
Q: Does that necessarily guarantee some kind of cover though for the fund, your fund is down 12% in the last three moths and there have been earnings concerns on many largecaps as well, not just midcaps?
Naren: Basically, our view was that you were moving to an environment where the global environment was looking very good and therefore stocks in the metal space will do well. That is the way we approached the fund over the last three months. Having said that, doesn’t mean that the long-term infrastructure story is in trouble in anyway. It was just a matter of timing and that is much better done through a fund rather than an individual stock.
Q: Want to get your thoughts on this power sector in specific amongst the entire infrastructure lot, not the power ancillaries, the pure power plays, how do you approach those stocks?
Kumar: I clearly see consolidation in that phase. It is very similar to what cement was in eight-ten years back where nearly everybody got into cement. There was huge amount of capacity being built up and that excess capacity at a point of time, when there wasn’t supply to match it caused a considerable consolidation. And you then had three major players that emerged in the cement sector which benefited from demand as it built up and have had possibly the best run leading upto 2009-2010 and you saw the same.
You saw a lot of hype in infrastructure, you have clearly seen the case of infrastructure development increased considerably over the last five-seven years. Within that, the private sector participation in infrastructure has gone to nearly seven-eight times. So, it has attracted a large number of players not necessarily all of them understand power well. I believe that you will see consolidation in the power sector. You are going to go into a period where you are going to get considerable amount of increases in power production annually starting from 2012 onwards, which will again trigger a consolidation phase.
I think power looks good, we have to play it with the right players and you have to play the people who will consolidate in that phase. I think that is more or less a story across the various sectors in infrastructure. Next three years is about consolidation, the previous three years was all about raising capital.
Q: A lot of individual hits are coming in though because of what is going on in that sector, merchant power rates have collapsed, SEBs have seem to be mired in problems, they are not picking up power, do you expect some of these private players who sell on merchant basis to continue to drag over the course of the year?
Naren: One is a medium-term view, our medium-term view is that merchant power rates will fall and there is no case for a big RoE to happen in merchant power company. Short-term, we have elections. We have a busy season for merchant power coming up. So, there are positives we can see in the short-term.
From a portfolio positioning point of view, we had virtually not invested in any merchant power company in the last one year because it was very evident that if you look at the mania of investment, just like in earlier periods of time it used to be different sectors
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