Infrastructure stocks look attractive: Kenneth Andrade, Chief Investment Officer, IDFC Mutual Fund

In an interview with ET Now, Kenneth Andrade , Chief Investment Officer, IDFC Mutual Fund , talks about the Indian market and his favourite sectors. Excerpts:

Characterise the current market environment for us. Are you cautious, are you fully invested, are you sitting on cash?

From a perspective of what we have been doing as basically looking at the environment currently and with realigning our portfolio into based on the results that just went by and the expectations into March, we have got significant amount of events that have been happening across the entire globe. So we are looking at spaces where we could actually trim our positions which are vulnerable to these moving parts. So that is what we have been doing. We have in the process created some kind of cash in the entire process where we have been looking to redeploy that in the next month or two. So in context where the markets are currently held on moving parts, it is very difficult to take a call on the market and build portfolios, but sticking with where the convictions are the highest and realigning our portfolios accordingly.

What is your view on infrastructure that is one space which has really been beaten down? Do you think a bottom is in place for most of these stocks and would you now be a buyer into it?

We have just closed our product in the infrastructure space. This is in line what we think is probably a nice time to take an allocation into that entire sector. What we would see coming with the March-end results and also balance sheets coming out you probably heading into the worse quality of balance sheet that you have seen over the last decade in these companies. Now that creates a significant opportunity. One, most of the companies will have to reassess the environment around them and rebuild their strategies to improving financial health of the business. Two, the space itself as we see it will be more consolidatory space rather than an expansionary environment. Now this is exactly the opportunity that we are playing for. In a consolidatory phase company has become a significantly more responsive to creating cash on their balance sheets through operations rather than looking at the external environment to raise cash now. This is good for an equity holder. On the other hand you will not see dramatic improvement or increase in balance sheet sizes and you would see balance sheets actually consolidate. So our view is somewhere in 2012 and 2013, you would see this entire balance sheets effectively consolidate themselves and that exactly the opportunity that is there. So we are going into the entire premise and this is a consolidation period for the entire industry and that is where the equity investor would make significant amount of return compared to an expansion phase which you had in the last 3 or 4 years wherein the equity investor were more at the receiving end in the space. So yes, in a way we do believe infrastructure valuations and business opportunity is there. These are appropriate time to start investing into the business.

What is your view on commodity prices? One side you have the Fed which is pumping the economy by QE2 and the Japanese bank also is now planning to inject about $85 billion, given the way how both central bankers are now planning to pump in more money will commodity prices go up more?

Most of our portfolio is extremely light in terms of commodities. A very large part of the allocation in our local portfolio or domestic portfolios are more playing the consumer economy in India, latter part of it is started and small part of that is effectively on the infrastructure side of the entire business. Now in line with what we are trying to do with the consumer part of the economy and the infrastructure part of the entire economy and if this plays out over the next 2 or 3 years, it may not make for an interesting view in commodities. One, the consumer part if consumers are going to determine volume growth in the entire business, the consumer economy is not very commodity intensive. Secondly, if we believe that infrastructure is going to be more of a consolidation play and rather than an expansionary play, again this may not be a very good thing from a commodity perspective. Now that is in line with what we are doing in India or most of our portfolio are doing in India. If you step back and look at the 12th five year plan which the Chinese economy has just come through with again the shift and the focus is towards enabling the consumer in that respective economies. If that holds true again, we probably may not have an environment which is very conducive for further commodities business. It is not like commodities are going to fall off the place where going to be a base demand for commodities which will continue to exist and there will be couple of commodities which are consumer intrinsic, which depend upon the consumer and end consumer and these are copper etc. They largely go into the electrical business which is again related to the consumer environment, consumer economy. So I guess we have to pick and choose as to which part of the commodity business you want to be with. So I guess something like crude, the demand will be reasonably tight and this is structural in nature given the fact that 35% of the world?s population which is a Chinese and Indians are earning double digit growth in their per capita incomes. So that is basically you will probably need to pick and choose on commodities rather than owning a basket of commodities in this environment.

You have bought consumption-oriented businesses for the year gone by which is the year 2010 and that worked like a charm for you. What is your big bet for the year 2011?

Well, little bit of infrastructure which seems to be basing out and the business still has reasonably amount of momentum still in the consumer part of the economy. So we would expect going into this year the two themes to effectively play out unlike a single theme that we have bought through 2009 and 2010.

In the near term though what is the call on the rate sensitives, in particular autos, because they seem a little edgy ahead of the policy?

With autos you also need to realise that they come out extremely high base and the environment that you see at this point in time is also a environment where rates are not coming down, which is what you rightly said. So I moderate my expectation from that sector, it probably would not do what it did last year, it could be a pocket of strength but again like you basically cannot say that it is going to be an entire sector that is going to do well you will have to pick and choose and that goes down to what markets might look like for 2011 and may be a very large part of 2012. You would need to pick and choose you may not find one particular segment of the market that gives you all the outperformance that is there.

If I look at your latest declared portfolio holding, you have exposure to Asian Paints , Shriram Transport and Exide. Your top holdings change in coming months?

Cannot see any reason to change that.

Why do you like paint companies? Why do you like auto companies at a time when the country is experiencing inflation? I am sure that will hit consumption patterns.

I guess these are all consumer businesses and in line with just talking about the consumer economy, the underlying part of the portfolio if you go across the top 10 companies or even the top 15 companies in the portfolio that we construct, all of them are industry leaders by themselves, all of their balance sheets which are non-geared and all of them are growing faster than index level itself. So even if you hit an inflation point or even if you hit a point over the next year or 2 years, where you see a slowdown coming in the entire system, our belief is that given the financial strength and the dominance of each of these players in their industry, they will only gain market share. So we effectively come from a position that these companies are already extremely strong and even if we hit a patch which is a slowdown, these guys will only increase market share. If the contrary of that happens and the market effectively expands also, then they will grow, with all the companies in this portfolios. So either which ways the portfolio is that we have constructed so far should withstand itself in an environment which is growing and even if the environment consolidates or slows down, these guys should come out reasonably stronger than what they are.

You also own textile stocks Arvind Mills , Shri Lakshmi . Textile stocks have never created wealth for any investor. Why do you like textiles?

Well, it is likely a contrarian in that space. We like the manufacturing business because they have reasonably run out of capacity at this point in time. Secondly again in line with our putting a portfolio together a very large part of that entire portfolio is oriented towards the largest guys in the entire business. Cash flows are extremely strong. So another year of these kind of cash flows and the financial health of these companies will be significantly better than what they appear to be and what they appear to be is also significantly stronger than what these companies were over the last decade. All of them are available in between 3 to 5 times cash payback and there is not much too debate as far as valuations are concerned except for the fact that there is lot of policy risk in the textile environment. Apart from that, we are in the sweet spot as far as that industry is concerned.

Source: http://economictimes.indiatimes.com/opinion/interviews/infrastructure-stocks-look-attractive-kenneth-andrade-chief-investment-officer-idfc-mutual-fund/articleshow/7699894.cms