VOLATILITY DEMANDS CONSTANT MONITORING
History seems to be working against these schemes. Most infrastructure funds were launched in the bull market of 2007 and early 2008. They were severely hit immediately after as markets tumbled due to the global downturn. "The infrastructure stocks were given very high valuations in 2007," says Abhishek Jain, head of research-equity , Greshma Shares and Stocks. Most projects of infrastructure companies are in the early stages. The companies have been, therefore, seeing negative cash flows over the past five years, forcing investors to shun them. Last year wasn't kind to the sector.
The Reserve Bank of India increased policy rates by 2.5% since March 2010. Banks have responded to the RBI action by increasing lending rates. Infrastructure companies, with one of the most leveraged balance sheets due to heavy loans taken to execute the projects, suffered the most. That is because as rates increased , the companies had to pay more as interest. This affected their profitability. The companies could not look at the capital markets to raise money due to the high volatility in the stock market.
The spiraling commodity prices also dealt a blow to these companies . Infrastructure companies consume steel, cement, coal and other energy inputs on a large scale. Speculators and investors have been parking their funds in commodities to maintain their purchasing power which, in turn, has kept commodity prices high for some time. "In the past six months, the rising commodity prices have shrunk the operating margins of companies across sectors," says Shailesh Kanani, senior research analyst with Angel Broking. In the infrastructure space, the players are involved in competitive bidding for projects, and the lowest bidders take home the business .
As a result, there are no fat margins to fall back on during difficult times. Infrastructure companies also face the brunt of rising commodity prices rise since they work on the basis of fixed price contracts. They have to bear the rising prices, which reduces their profitability. Also, there has been considerable slowdown in the new orders coming their way. The government's spending has reduced. "Issues relating to environment, lack of stable management in various public sector undertakings , land acquisition policies and the recent state assembly elections had led to a dip in new business," says Shailesh Kanani. The mid- and small-sized companies have reported lower profits in the recent past, and they were punished by investors.
THE FUTURE OUTLOOK
However, the future doesn't look that bleak. According to bankers, the RBI may be almost done with rate hikes and there is limited upside for interest rates from here on. If the interest rates stay stable in the last quarter of 2011, infrastructure companies will be the key beneficiaries. "Commodity prices are unlikely to remain at these high levels for a long period of time," says Abhishek Jain. The withdrawal of quantitative easing in the USA is expected to curb commodities' prices in the short term.
This is expected to support the falling margins of infrastructure companies. "In the recent past, there have been developments that could benefit the infrastructure companies ," says Sadanand Shetty, VP and senior fund manager, Taurus Mutual Fund. "There have been, for instance, a meeting of a group of ministers to ensure smooth coal linkages, and the National Highway Authority of India has resumed awarding road contracts." As new orders start trickling in and more clarity emerges from the government on environmental issues, infrastructure companies will find the going good. The new land acquisition bill, which is on its way, will ease bottlenecks relating to land acquisition for large projects.
"The market has factored in most of the adversities facing the infrastructure companies and there is limited downside from here in this space," says an equity analyst with a mutual fund. The valuations are attractive for long-term investors. If the Indian economy is keen to achieve more than 8% growth over the next decade, infrastructure has to improve. In the past, it has been observed that any government at the centre increases infrastructure spending in rural areas in the second half of its tenure. If the trend were to continue , there will be ample business for infrastructure companies over the next two-to-three years. "This is a good time for an investor to gradually build the infrastructure portfolio," says Sadanand Shetty.
WHAT TO DO?
Equity investors make the most when they invest at distressed valuations. But infrastructure companies' businesses are complex and difficult to value. Beyond the quantitative factors, qualitative factors such as corporate governance and project execution abilities of each company also need to be evaluated. Though fund managers are capable of picking the better candidates for their portfolios, there is always the risk of unknown variables, such as changes in government policies or credit markets over a long period of time, that could affect companies in the sector.
"We prefer diversified equity funds over infrastructure funds, but if you are keen to invest in an infrastructure fund, it is better to invest with a five-to-seven year time frame," says Lovaii Navlakhi , managing director and chief financial planner, International Money Matters. "Existing investors can hold on to their investments if they have a fairly long-term view and their allocation to infrastructure fund is well within the limits prescribed by their asset-allocation plan," says Navlakhi. If you have invested up to 5%- 10% of your total equity investments in infrastructure funds, you can continue to hold them. But if you have invested more than that, it may make sense to sell a part of your holding to invest in a diversified equity fund.
Source: http://economictimes.indiatimes.com/personal-finance/savings-centre/savings-news/your-infra-bet-could-begin-to-pay-off-finally/articleshow/8742388.cms
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