Where are Infrastructure Funds heading in 2020

Infrastructure funds

The last two years opened up frailties in the Indian economy. This has deeply affected the performance of infrastructure funds in the country. There are issues on unsold inventory, low demand for real estate from consumers, dwindling launches, bankruptcies, lowering GDP growth and non-availability of credit. In this post, we examine how thematic Infrastructure mutual funds have performed in the last few years. We also see if 2020 is likely to see an upswing in their fortunes.

Up. Down. Confused. These were the three states of Infrastructure funds in 2017, 2018 and 2019 respectively.

2019 was very unique in the perspective. While the environment in the space moved from difficult to very difficult, there were also opportunities. These opportunities resulted in a near-flattish performance over the last one year in the stock markets.

Factors that contributed to poor performance of Infrastructure Funds in 2019

1. Unavailability of Credit

The non-availability of credit affected infrastructure companies the most out of all sectors. The period was one where the financial services sector was besieged by scams, defaults, delayed payments and lowered ratings from credit agencies for NBFCs and banks. Loans to the real estate sector or utilities are never high in the list of lending organizations. And this affected the sector’s ability to raise capital expenditure and working capital borrowings.

2. Laggard Growth of the Indian Economy

The Indian GDP grew by just 4.5% in September 2019 which was the lowest in the last 24 quarters. It got worse in the first week of January 2020. The World Bank downgraded it’s growth rate projection for the Indian economy for FY2019-20 from 6.5% to 5%. This 5% growth rate is the worst Indian economy projection made by the World Bank in the past 11 years. Prior to this projection, the State Bank of India’s research team projected a 4.6% growth rate for the economy.

Infrastructure is a core component of any growing economy. Any weakness in the economy will have strong effects on a high correlated infrastructure sector.

Recent quarters reveal slowing growth of the Indian economy
Recent quarters reveal slowing growth of the Indian economy

3. Political Fragmentation

2019 saw a period of political fragmentation. Past political regimes lost to new governments in many states which casts a shadow on the infrastructure execution projects.

Regional governments often show aggressive intent by reviewing, opening and cancelling contracts awarded by the outgoing governments. Some prominent states where a regime change has happened include Maharashtra, Karnataka, Rajasthan, Madhya Pradesh, Jharkhand and Chhattisgarh.

Most infrastructure projects are central in nature i.e. financed by the centre. However it does require the co-ordination of all parties which include state governments. The long gestation of these projects means state government of multiple parties will be involved over time. This raises complications.

4. Investor Apathy towards Infrastructure Companies

2018 and 2019 was also a period of investor apathy towards stocks that are a part of the infrastructure space.

The benchmark (BSE Infrastructure Index) in 2016 and 2017 delivered returns of 11.7% and 35.0% respectively. This was followed by -21.7% and -11.3% returns in 2018 and 2019. This change in fortunes almost nullified all gains made by the index over this four year period.

Consequently, we see investors moving away from this sector which brought further drawdown. The constituents of this sector include nation builders like GAIL (India) Limited, Indraprastha Gas Limited, Larsen & Toubro Limited, NBCC (India) Limited, Oil & Natural Gas Corporation Limited, Power Grid Corporation of India Limited, Tata Power Company Limited etc.

The BSE Infrastructure Index has 30 stocks in it and has seen many ups and downs over the last five years (2015 - 2020)
The BSE Infrastructure Index has 30 stocks in it and has seen many ups and downs over the last five years (2015 – 2020)

The silver lining in this doom for the sector has been the growing government initiatives to revive the economy. The government published the Infrastructure Vision 2025 spelling out the government’s core areas of focus. These include renewable energy, digital services, education, road & rail connectivity, ports, housing, water, irrigation, pipelines and healthcare.  

Infrastructure Vision 2025 includes the Indian government's core areas of focus such as renewable energy, digital services, education, road & rail connectivity, ports, housing, water, irrigation, pipelines and healthcare
Infrastructure Vision 2025 includes the Indian government's core areas of focus such as renewable energy, digital services, education, road & rail connectivity, ports, housing, water, irrigation, pipelines and healthcare

Performance of Infrastructure Funds

The average infrastructure themed mutual fund has done generally better than the benchmark it follows. The benchmarks are either the NIFTY Infrastructure TRI or S&P BSE Infrastructure Index.

Overall, we see that infrastructure funds have periods of top-notch performance followed closely by down-in-the-dump performance (or vice versa depending on how you want to look at it)

Let’s map it in years.

The average Indian infrastructure themed mutual fund delivered the following returns from 2009 until 2019 –

  • 2009 : +70%
  • 2010 : +8%
  • 2011 : -32%
  • 2012 : +27%
  • 2013 : -10%
  • 2014 : +64%
  • 2015 : -1%
  • 2016 : +2%
  • 2017 : +49%
  • 2018 : -20%
  • 2019 : +1%

We see that infrastructure funds are not for the ones who detest volatility. As an investor in infrastructure funds, you have to be prepared for it.

The timing of your entry becomes very crucial when investing in a fund like this. An example here. If you have put in ₹10,000 in 2008, the average infrastructure fund delivered an annual return 10.1% taking your corpus to ₹28,900. However, if the ₹10,000 were invested in 2009, the fund would have delivered just 5.4% per year giving you a wealth of ₹16,900.

However, the exciting part is that we see some infrastructure mutual funds have done really well over the year.

In the next section we will examine the ones that can be a part of your investment portfolio.

Best Infrastructure Funds

As it stands, there are 18 fund houses that are offering an infrastructure themed mutual fund. Most of these have been in existence for over 10 years now which gives us a good base to work on.

These 18 infrastructure themed schemes are –

  • LIC MF Infrastructure Fund
  • Invesco India Infrastructure Fund
  • DSP India T.I.G.E.R. Fund
  • SBI Infrastructure Fund
  • Tata Infrastructure Fund
  • Franklin Build India Fund
  • Kotak Infrastructure and Economic Reform Fund
  • BOI AXA Manufacturing & Infrastructure Fund
  • Canara Robeco Infrastructure Fund
  • ICICI Prudential Infrastructure Fund
  • Sundaram Infrastructure Advantage Fund
  • UTI Infrastructure Fund
  • IDFC Infrastructure Fund
  • Aditya Birla Sun Life Infrastructure Fund
  • L&T Infrastructure Fund
  • Nippon India Power & Infra Fund
  • HDFC Infrastructure Fund
  • HSBC Infrastructure Equity Fund

A good starting point is to see how have the funds performed on an year-on-year basis. Lets see that in the table below.

Infrastructure Funds offered by multiple fund houses have had outlandish returns to losses over the last 11 years (2009-2019)
Infrastructure Funds offered by multiple fund houses have had outlandish returns to losses over the last 11 years (2009-2019)

These are a lot of numbers. A good way to refine this data is to look at how each of the funds have been ranking over the years. Your objective here is to pull out the most consistent ones

Some fund houses have shown remarkable consistency in remaining in the top half of the ranking for years on a consistent basis (2009-2019)
Some fund houses have shown remarkable consistency in remaining in the top half of the ranking for years on a consistent basis (2009-2019)

I generally assess the funds for consistency of performance over periods of time which helps me arrive at my best infrastructure funds.

Here’s my list of Best Infrastructure Funds

  • Franklin Build India Fund
  • DSP India T.I.G.E.R. Fund – Regular Plan
  • Kotak Infrastructure and Economic Reform Fund
  • L&T Infrastructure Fund

And here is how these four funds have fared thus far.

What can an investor expect from Infrastructure Funds in 2020?

This is difficult to assess largely because there is so much noise. There is talk of the grim situation of the economy, credit offtakes, unemployment, initiatives that are not firing on all cylinders etc. In an environment like this, investors often can only look at doom and gloom. 

But in such doom also lies the opportunity. Businesses can be picked at delicious valuations that might otherwise not be available.

I took a peek at the portfolio of Franklin Build India Fund. There are a number of companies in that portfolio who have been belted down by 15 to 30%. These seem attractive although greater assessment is warranted.

Further, a number of these beaten down stocks operate at an ROE of 10 to 20% which signifies good business metrics.

Portfolio of Franklin Build India Fund has a number of beaten down stocks with good ROE and EV/EBITDA ratio showing good, investment worthy valuations
Portfolio of Franklin Build India Fund has a number of beaten down infrastructure stocks with good ROE and EV/EBITDA ratio showing good, investment worthy valuations

From a macro perspective, it is still difficult to say when the tide around the Indian economy if likely to turn. But if history is generally repeated, it will be difficult to argue that another of those 25-40% jumps in the infrastructure funds is waiting to happen.

Overall, infrastructure funds are cyclical bets and investors should be careful when investing in these funds. But the very nature of cycles profess some opportunity buy and make a good bunch of money.

You and I come by road or rail, but economists travel on infrastructure

Margaret Thatcher, former prime minister of great britain

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