Infrastructure fund yields depend on govt expenditure, say analysts

Segments like power, telecom, logistics, real estate and construction have turned attractive
Infrastructure funds have enjoyed a good run, rewarding investors with a category average return of 71.3 per cent over the past year. Fund managers say despite this run-up these funds could continue to do well over the next few years owing to higher government expenditure on infrastructure and the resu­mption of capital expenditure (capex) by the private sector.

Private capex could revive

Government spending is expected to be the key driver of this sector. “By 2025, the government (in public-private partnership mode) is expected to spend Rs 111 trillion on infrastructure, almost double the Rs 57 trillion it had spent between 2013 and 2019,” says Amit Nigam, fund manager, Invesco Mutual Fund. The government’s intent to spend heavily on infrastructure, he adds, is also apparent from its plan to bring down the fiscal deficit, pegged at 6.8 per cent in the FY22 Budget, gradually to 4.5 per cent by FY26.

According to Ihab Dalwai, fund manager, ICICI Prudential Asset Management Company (AMC): “The aggressive Budget allocation by the government to infrastructure has given construction companies good order book visibility and helped them scale up their operations.” 

Fixed-asset formation by the private sector could gather pace after remaining low for several years. “As capacity utilisation levels pick up, corporates are likely to invest to build capacity,” says Dalwai.

The government’s production-linked incentive (PLI) scheme, which has been extended to more sectors, and the promise of a 15 per cent tax rate for new domestic manufacturing units are incentives that could trigger private sector capex, according to Nigam.

Attractive themes

Segments like power, telecom, logistics, real estate and construction have turned attractive. “Competitive intensity has reduced across these sub-sectors. Companies that have survived are likely to have substantial market share and better margin profile in the future,” he says. He is also bullish on banks that are well capitalised and have good liability franchise, and the commodity space. The infrastructure sector, according to him, can perform well during the recovery phase of an economic cycle.

Watch out for risks 

There has been a rally over the past year, so valuations have run up, especially of quality stocks. Infrastructure is a very broad space, which makes it difficult for investors to have a view on it. And while it is true that the government plans to pump funds into infrastructure development, predicting its course is difficult. If the pandemic continues, it could be forced to allocate more funds to healthcare and programmes for the poor. 

With some exceptions, infrastructure companies tend to have low return on investment (RoI). The sector is heavily cyclical. Creative accounting has plagued it (construction and real estate companies in particular) in the past. Many of the stars of the 2003-2007 rally have gone bust due to these issues.

Should you invest?

Most retail investors, especially new ones, should avoid taking exposure to sector funds. “If you invest in them, you will need to time your entry and exit correctly. Most retail investors will find it difficult to pull this off. Also, to predict accurately which sector will outperform next is almost impossible,” says Ankur Kapur, managing partner, Plutus Capital, a Sebi-registered investment advisory firm. 

Most retail investors should stick to diversified-equity funds. If companies within the infrastructure sector are poised to do well, their fund managers will take exposure to these stocks. Only investors with an in-depth understanding of the sector and high risk appetite should invest. They should limit their exposure to an infrastructure fund to 5 per cent of their equity portfolio.

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