Fund Focus: Canara Robeco Infrastructure Fund
Time to embrace this sector again?
Yogesh Patil, Fund Manager, Canara Robeco MF
30th May 2016
In a nutshell
Infra - the poster boy of the last bull market, quickly became the biggest villain in investor portfolios in the crash that followed. A couple of false starts in 2012 and 2013 left advisors frustrated with the infra theme. Is it time to move on from those bitter experiences, take a fresh look at the theme in its new avatar, and embrace it once again?
Yogesh takes us through the journey of how the sector was once viewed from an investment perspective, the lessons learnt by the market, and the manner in which a prudent approach now promises to harness for investors some exciting opportunities ahead, in an environment where infrastructure development has taken center-stage under an execution focused Government.
Click here to know more about percentiles and the colour codes
What do percentiles and their colours signify?
Fund performance is typically measured against benchmark (alpha) and against competition.
Performance versus competition is measured through percentile scores - ie, what
percentage of funds in the same category did this fund beat in the particular period?
If a fund's rank in a year was 6/25 it means that it stood 6th among a total of
25 funds in that category, in that period. This means 5 funds did better than this
fund. In percentile terms, it stood at the 80th percentile - which means 20% of
funds did better than this fund, in that particular period. If, in the next year,
its rank was 11/26, it means 10 other funds out of a universe of 26 did better than
this fund - or 38% of funds did better than this one. Its percentile score is therefore
62% - which signifies it beat 62% of competition.
Most fund managers aim to be in the top quartile (75 percentile or higher) while
second quartile is also an acceptable outcome (beating 50 to 75% of competition).
What is generally not acceptable is to be in the 3rd or 4th quartiles (beating less
than 50% of competition). Accordingly, we have given colour codes aligned with how
fund houses see their own percentile scores. Green colour signifies top quartile
(percentile score of 75 and above), yellow or amber signifies second quartile (percentile
scores of 50 to 74) and red signifies 3rd and 4th quartile performance. A simple
visual inspection of colour codes can thus give you an idea of how often this fund
has been in the top half of the table and how often it slips to the bottom half.
A great fund performance is one which has only greens and yellows and no reds -
admittedly a tall ask!
WF: Many advisors are wary of the infra theme - in part because of the meltdown post the euphoria of 2007 and in part because of a couple of false starts since 2012-13, when interest in the sector proved to be just a passing fad. Is the wariness justified or are we missing a promising opportunity due to our past experiences?
Yogesh: In 2007, investors looking at exposure in Infrastructure sector preferred high growth companies and expected good growth numbers & large order book size to be the key premise of investments; very little did they know that their negligence in sighting future cash flows could result in steep draw down in prices of such portfolios. The major reasons for the under-performance vs. expectations then were lack of visibility of future growth avenues, poor / delay in execution and higher receivables resulting in cash flow mismatch etc.
There have been considerable changes in economic conditions in the country since 2007. Be it the transparency and availability of information, or a result oriented government at the Centre, the outlook towards growth of Infrastructure in India looks positive and promising. Projects like Metro in Kolkata, DFCs in Railways, Major development in roads and highways, 'Namami Gange' - Ganga purification project etc. are good indicators of that prime agenda & focus of the central and state governments is likely to be up-liftment of the infrastructure of the country. These development projects are seen as showcase projects by the state governments to grab the attention of the centre; directly and indirectly working in favor of the Indian population. Past experiences have made investors extra cautious before plunging into this sector. However, if India has to be amongst the fastest growing countries, and if the GDP has to be maintained at a higher level, a definitive push has to come from the infrastructure space. (For eg: During the period 2011 - 2015, Gross capital formation (% of GDP) for China was 46% whole that of India for the same period was 32%. Source: www.data.worldbank.org). This presents a great opportunity for several companies associated with the Infra theme given the huge size of the Indian population and requirements therein)
This sector has been attracting a lot of foreign participants - banks and trusts alike, who foresee Infrastructure to be an area of huge opportunity in the Indian Markets. Amidst global deflationary conditions, foreign banks benefit from investments in India by earning higher interest rates and thereby increasing their book size while India gets the necessary funds available. Funding from foreign banks from developed economies like Japan, Germany, France etc. is a win-win situation for India and those countries. Overall, a stable Centre, government's willingness to push infrastructure projects, India's demography and low global interest rates are key positives that are different from the conditions around 2007. We strongly believe that the infra space will be an antecedent to the development of all other segments of the economy. Though there will be intermittent bouts of volatility, companies in the infra space are well positioned to see healthy growth as a precursor to the growth of the Indian Equity markets. We believe that certain spaces in the Infra sector like Water, Roads and Railways are expected to deliver superior returns and investors should grab this opportunity with both hands.
WF: The current anxieties around over-leveraged corporate balance sheets are linked to two sectors - infrastructure and commodities. There seems to be a dichotomy between increased infra spending by the Government (top-down) versus poor quality balance sheets of the players who are supposed to benefit from this (bottom-up). How then does one harness opportunities in this sector?
Yogesh: In today's market conditions, investors should definitely avoid highly leveraged companies which were market darlings (in the period around 2007) purely on account of their high growth projections. However there still are companies in the Infra segment which have visible cash flows and lower leverage making them optimal cases for investments.. Investors targeting the infra space could generate solid returns from portfolios that comprise investments in low leverage companies with a competitive edge over peers and backed with strong fundamentals & good earnings visibility over the next 3-5 years. We see various opportunities embedded in sectors like Roads, Water Treatment, and Railways etc.
For example, encouraged with the good show in highway construction during FY 16 , the Roads Ministry has increased the target for awarding projects by 2.5 times to 25,000 km for the next fiscal. Funds amounting to approx. Rs. 40,000 crore from Namami Gange project will be spent from October this year and will be completed by 2019 (as instructed by Supreme Court). Indian Railways envisages an investment of around INR 8.5 lac crores in the next five years which is ~ 60% more than the previous 5 years spending. All these, hint towards the innumerable opportunities in these sectors and investors can harness these by taking advantage of positive opportunities arising in these sectors.
WF: From a fund management perspective, in what ways has portfolio strategy and composition within the infra space changed from the heady days of 2007 to the more sober present day scenario?
Yogesh: Like major market participants, several fund managers in 2007 preferred investing in high growth companies with little clarity or road map of cash flows. Hence, even small disruptions could lead to big cash flow mis-matches. This investment model of investing in high leverage companies hence saw a big collapse. The infrastructure sector was bitten by a dual curse of over valuation and low earnings visibility which eventually caused the bubble to burst; causing disenchantment amongst investors.
Since then investors have become more prudent when it comes to investing in the Infra space, learning from the past mistakes. They are now evaluating all the aspects of the entire investable universe and opt for a more conservative approach; 'Once bitten twice shy' could be the right term to address this situation. Not only investors, large corporations and government also have learnt from mistakes made earlier. For e.g.: NHAI has become more prudent in the allotment of road projects and now acquires 100% land before awarding the road contracts. As a fund house, our focus has been in finding companies which are expected to be the beneficiaries of the enormous focus received from the government. While trying to avoid high leveraged companies, our focus has been on companies where there is a good visibility on execution, earnings & cash flows. Hence, without altering our investment philosophy to a larger extent, we have made investments in growth stocks having a competitive edge over their peers.
WF: Your fund posted strong alpha over the last 2 calendar years. What does your attribution analysis suggest as the key alpha drivers?
Yogesh: Canara Robeco Infrastructure is a fund that invests in companies which participate directly in the strong growth story & positive infrastructure changes in our country. Superior stock selection focused on Growth Oriented Companies with earnings visibility that are 'Market leaders' and investing in ideas with 'Unique Business Proposition' has helped our fund perform well in the past. Avoiding investments in heavy asset owners, companies with high leverage and those with over ambitious management have also played a part in the fund's out-performance.
WF: How are you positioning your infra fund now in terms of sectors and strategies to avoid the pitfalls and yet harness the big opportunity that the theme represents?
Yogesh: As a fund house, our focus has been on investing in areas which are expected to benefit from the intense focus of the government. Like contrary to conventional thinking, cement, which is seen to be cyclical in nature, has seen positive volume growth in all of the last 11 years which is comparable to FMCG sector generally considered to be unaffected by recessions Source: Department Of Industrial Policy & Promotion (DIPP). Hence not only proper stock selection, but selection of the right sector to invest in can make a huge difference in the returns.
We are largely invested in those sectors with higher visibility on critical aspects like project funding and execution timelines. As mentioned earlier we believe in investing in 'Market leaders' and companies with 'Unique Business Proposition'. For our Infra portfolio we endeavor to select companies which are expected to demonstrate a high probability of a 15%-25% plus earnings CAGR over the next 3 years. As a part of our investment philosophy, we continue to invest in high conviction ideas and have identified some megatrends like Surface Transport, Logistics, Urbanisation and Reforms in Water Treatment & Purification as growth drivers for our CR Infrastructure Fund.
The information used towards formulating the outlook have been obtained from sources published by third parties. While such publications are believed to be reliable, however, neither the AMC, its officers, the trustees, the Fund nor any of their affiliates or representatives assume any responsibility for the accuracy of such information. CRMF, its sponsors, its trustees, CRAMC, its employees, officer, directors, etc assume no financial liability whatsoever to the user of this document. Mutual Fund Investments are subject to market risk. Investors are requested to read the Scheme related documents carefully before investing.
Mutual Fund Investments are subject to market risks, read all scheme related documents carefully.
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