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Charts & Analysis

IDFC Infra Fund NFO: Quick Analysis

I had a chat with the IDFC Mutual Fund team recently. They have an infra fund launching between 14th and 20th of this month, and I spoke to members of their fund management team.

So first – salient points – here’s the scheme document. The NFO runs from 14th to 28th of Feb. They will deploy the money starting 5 March. There’s an exit load of 1% if you get out within a year. There is no entry load.

Note: I do not get paid by IDFC for writing this. I’m not an investor in their company. I have no commercial relationship, at the moment or even visible at the time of writing this post. I don’t do paid posts, ever. (Unless you will give me Rs. 50 crores. I accept cheques and bank transfers.)

I’m going to do a Q&A format for this fund, gleaned from the answers team gave me.

Okay, so what is this fund about? What is "Infrastructure"?

They will go by the World bank and RBI definition. Road, ports, water, telecom, SEZs, power, construction, real estate, Oil and Gas. Which sounds like a lot but they told me they WILL NOT do: IT, Pharma, Banking, FMCG and Auto.

Their idea is to hit low debt companies (or low geared) with reasonable cash flows and later, consolidation targets. The sales pitch is to target it piece by piece, as valuations crumble under inflation; first the visible-cash-flow companies (utilities and the like), then the contractors (L&T types I imagine?) and later the players that will get better on consolidation. Interesting play, really.

Why another fund? Why another Infra fund? Why now?

Why another fund? While this is sectoral focus, IDFC has a crazy number of equity funds – Classic Equity, Imperial Equity, Premier Equity, Strategic Sector 50-50 Fund, India GDP Growth Fund, Small and Midcap Equity Fund and Enterprise Equity Fund. Apart from the Nifty Fund (Index) and a Taxsaver Fund (ELSS). This is too much, and par for the mutual fund course in India – there is simply too much out there doing the same thing; you could achieve pretty simple objectives by having a single large cap fund, one mid/small cap fund and the index/taxsaver outliers. Sector funds: one per sector.

Why another Infra Fund? Because (they say) other funds said infra and went and did everything including IT and Pharma. For the record, this is what I got from the conversation. I have not verified this.

Why now? Valuations are better, and attractive, they say.

Will the sector not get destroyed by rising interest rates?

They did say low-debt companies in general. But yeah, this is a high debt sector. Plus, given the government guarantees required to run this space, you need fiscal strength at the government end, and that also looks dicey.

IDFC, their parent, is an infrastructure finance company. What gives?

I didn’t really get this piece. They said there’s some sort of Chinese wall, but they do exchange notes, formally and informally. You can either have a chinese wall or not but not parts of both.

What I’m concerned about – will they take all the good portions into their parent (they have P/E funds that do equity), and saddle us retail investors with the bad part? The answer will only be visible in time.

How much % of their liquid net worth do the fund managers own (or plan to own) in the fund?

This is a question no one seems to ask. The answers I got were:

  • There is no practice of disclosing such things, so we won’t tell you either.
  • They recommend that their employees invest 30-40% of their liquid funds in IDFC mutual funds.
  • There was some 10-15% figure thrown about.

Honestly, if you’re running a fund, you should have your own money in it. But these are not hedge-funds, these are mutual funds, so one should get some leeway (plus, IDFC owns it, so the fund manager could be fired or changed anytime).

What’s the verdict?

Sector funds are horrible in upturns and great in downturns. The sector has been destroyed, for the most part.

Nifty versus CNX Infra

(Click for larger pic)

But obviously there is more to come. There are other infra funds out there, which have also done badly, almost all negative returns in the 3 year time frame. With the notable exception of Canara Robeco Infrastructure, which has given a 6% annualized return in the last four years.

Infra fund performance

Why not buy the stocks directly? Oh, that might work. The sector has thrown open some incredible stories – like Elecon Engineering (P/E of 6 now, grown nearly 50%) which I’m long, to the likes of REC, PowerGrid and PFC which must be salivating to the value investor. Even RELINFRA, battered by rumours, must look like a good pick. Heck, you could just piggyback on the infra fund picks, which they release as part of their portfolio every month.

But if you don’t have time, don’t even bother. Sectoral funds have a higher volatility, but they’re always good when the sector is down. Still, we’re not yet in "tough" markets – compared to earlier, the market is not "down" enough. But then if you don’t have time, you won’t have time for timing either.

IDFC has the NFO till the 28th. The 28th is when the budget comes, which is the day you’ll know about the greatness or the suckiness of the infra space going forward, and that impacts everything.

You have to ask yourself – do you want an infra sector fund? There’s hajaar volatility, but do you believe in that sector AND that valuations are low? Do you believe that inflation won’t hurt this sector enough to make your fund value so low you’ll want to sell? If the answer to any of these questions is "What the F are you talking about? Speak English!" – do not buy this fund. Don’t invest in what you don’t know, and don’t risk what you can’t afford to lose.

On a personal note: I will be directly investing in stocks, not buying this fund or any other such fund.

  • Viral Dholakia says:

    >I feel Infrastructure stocks have been beaten down out of shape. Some stocks are quoting at more than 156 week lows (i.e., 3 years).

    Yes, risk of rising interest rates depressing the sector remains, but then interest rates are never stable in long-term – they rise and they fall as well.

    Its a cyclical phenomenon, it will come down over a period of few years as macros such as inflation cool down. Everything that rises has to come down. The inflated Onion prices were the best example.

    People will say that interest rates coming down defies logic… but, that's a myth. They're saying same for the real-estate sector too right now, that it wont correct. But, it ought to come down – if not now, than later.

    In a nutshell, when rate cycle turns, this very infra stocks will bloom. It might take time, but its best time to buy these stocks when the going seems tough.

  • Vikram Shah says:

    >I completely agree with Mr. Viral Dholakia. But at the same time I agree pessimism has been in the air for quiet some time. The funds have not been able to bloom earlier because of corruption and various other such negative aspects associated with the diversion of funds and its execution. But now India is evolving with around 81 contractors having given notices. Monorail and Metros in Mumbai to be specific are being made. So in short the infrastructure sector although had not been performing well earlier is likely to grow in the near future. India is currently short on power capacity and our current demand is estimated to be around 190 GW and the requirement is bound to increase. Also, in terms of roads we have one of the largest private public partnership programmes in the world. What’s more Airports, Metros are all assets that have been tendered out to the private sector. Infrastructure will see return of profitability and sizable reduction in balance sheet debt by all companies operating in this space. I think this is the time to grab this opportunity with both hands and invest in infrastructure funds.

  • Anonymous says:

    >what about punj loyd? seems beaten down.

    is it a buy from long term perspective (>3 yrs)?

  • Deepak Shenoy says:

    >Viral: I agree. I like this sector.

    ANon: PunjLloyd has not shown profits despite getting a lot of stuff out there. I think I'd buy only after they show profits. Technically it's DEAD on the charts. Even with this recovery of prices.

  • Anonymous says:

    >A few things after reading this thing – On the timing part, the AMC got approval on September 2010 from SEBI to launch it, the approval stays valid for 6 months post which they need to file again for approval. 6 month period expires on March 2011.
    Secondly – It is helping them thats markets have fallen and capital good stocks have almost capuliated, now had markets sustained for a few more days, all this gyan would have looked foolish.
    Thirdly – If the stocks are available so cheap, why not buy them in one of the numerous diversified funds and make it outperform rather than getting a NFO.
    Lastly – They say they will be heavy on utilities initially as they good in a rising interest rate scenario, but all their diversified funds are also heavy on utilities so why NFO…
    JUST A Money making Gimmick…As far as IDFC as parent is concerned, had it been a pvt. equity fund, then that logic works as IDFC's expertise cannot be disputed but in the listed space with CNX Infra as universe of Stocks…I guess All fund managers in the industry are open to take stocks from that universe…and IDFC expertise is of no use there. STOP FOOLING INVESTORS' !!!

  • Pi says:

    >These 2 sectors – real estate, infra alongwith construction partially are having bear markets of their own.. they will take time to recover.. first they will make lows..then move sideways for months at a end.. ppl will buy and buy and get tired of holding.. slowly it will slip out of everyones mind.. after many months (12-36) of sideways consolidation they will then breakout & again become multibaggers.. now i would say the ideal way to play this would be

    a. not to buy individual stocks
    b. not to buy them now
    c. not to buy them at one go
    d. do SIP in infra funds. choose funds which stick to investing in core infra stocks..rather putting money in banking/it other sectors in name of infra
    e. forget about it.. dont look at them as trading plays.. you wont know when the eventual breakouts from the base will happen.. these havnt even started building the base yet.. so just hold and forget.. evaluate every quarter.. in the quarter you see that these funds have doubled from their bottom.. then you start putting big chunks into them..


  • prasanth says:

    >I agree with most of the assessments in the blog post.

    As you point out the infrastructure industry is down. Not a single one is spared, so when they start moving up agian. All of them will also start moving up.

    So you will get the best of both worlds. You don't have to risk it with one stock and you gets the benefits when the whole sector moves up.

    Just a investor like you guys.