At the beginning of calendar 2014, Srinivas made a strong case for the infrastructure sector, based on the fact that mean reversion had to create a bounce back in this beaten down sector. Now that mean reversion has happened and valuations have come back to normal zone, what next for infrastructure funds? Read on as Srinivas takes us through the road ahead for the sector and his analysis of performance of the HDFC Infrastructure Fund.

WF : When we interviewed you in Feb 2014 (Click Here), you made a cogent case for a bounce back for the infra sector, which was then trading at a 44% valuation discount to market. Now that the mean reversion has happened as you forecast, what is the road ahead for this theme?

Srinivas : In January '14 when we released our initial report on HDFC Infrastructure Fund titled "HDFC Infrastructure Fund - Best suited for economic recovery", we expected things to improve as economy, corporate profitability and Infrastructure sector were at historical lows. Since then, there is a gradual recovery in economy but the election outcome made future outlook extremely positive for sectors linked to country's infrastructure.

Hence in August '14, we have released our sequel to the initial report titled "HDFC Infrastructure Fund - Best positioned for improving environment" outlining our reasons for continued optimism.

WF : With the change in political landscape, do you now see infrastructure becoming a leader in this bull market?

Srinivas : I don't know about the leader for this bull market but Infrastructure sector would do very well as the new Government is keen to increase GDP growth and create more jobs. Reviving and improving Infrastructure is essential to attract investments into manufacturing sector and create more jobs. Investors are aware of what happened in Gujarat over last ten years and they're hoping and expecting the same to get replicated at the national level. All the initial steps and decisions taken by this government are in that direction. This along with acute underinvestment in the past would mean growth rates would be very healthy for infrastructure sector in the coming years.

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 : Your fund's performance this year has been remarkable - in terms of alpha as well as vs competition. Last year however was perhaps one of your toughest years. What were the challenges of 2013 and what changes did you make to drive the fund's performance this year?

Srinivas : Last year when the outlook for the Indian Economy and Infrastructure was looking challenging, the Fund's performance was negatively affected. HDFC Infrastructure Fund is the only thematic fund from HDFC AMC and we have been highlighting that this Fund carries higher risk compared to diversified funds. HDFC Infrastructure Fund offers the most comprehensive play on Indian Infrastructure. We would like play this theme through 1) asset creators (Construction and capital goods companies), 2) asset owners and 3) asset financiers. Over 80% of scheme AUM has been invested in these segments since inception. Outperformance of the Fund vis -a- vis the benchmark in the last one year is due to following this discipline consistently and staying invested in Infra and Infra related sectors. In other words, out performance is due to not making significant changes in the portfolio and aligning it to its investment objective.

WF : A look at the Y-o-Y performance over the years seems to suggest that your fund underperforms benchmarks and peers in bad market phases and significantly outperforms in healthier markets. What in your view accounts for this pattern?

Srinivas : As highlighted in the earlier answer, this Fund's mandate is to invest in companies that would benefit from Indian Infrastructure. Infra and Infra related stocks tend to be more volatile compared to defensive sectors like FMCG, Pharma and IT. As a result Fund performance also tends to be more volatile than the benchmark and peers having more diversified exposure (like exposure to consumer, pharma and other defensive sectors).

Having said that we believe that as valuations of infra related stocks still at a discount to defensives and further with new Government having focused on development with good governance, the outlook for infra related sector is promising which is likely to benefit the fund performance.

WF : Which are the sectors and themes within the broad infra space that you are most optimistic about now?

Srinivas : We are positive on overall Infra space as India is going to see a significant jump in capital spending across 1) manufacturing 2) Infra 3) services. Our endeavor is to invest in companies that offer maximum risk-adjusted returns. We are evaluating companies based on current valuations vs. growth potential in the context of their current profitability vs. future profitability, leverage, new opportunities and management credibility.

DISCLAIMER: The views expressed by Mr. Srinivas Rao Ravuri, Fund Manager - HDFC Infrastructure Fund, constitute his views as of September 15, 2014. The views are based on internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The statements contained herein are based on the current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Past performance may or may not be sustained in future. Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein.

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