Funds rediscover love for India infrastructure shares
*Funds bet on a pick-up in infrastructure firms' earnings
*Clear roadmap for infra to set the stage for further buying
*Power, construction stocks among the most bought stx in May
*At least six fund firms seek nod for infra funds in June
MUMBAI, June 24 (Reuters) - Infrastructure shares are hot commodities for funds in India after the recent elections, and their attraction is only set to grow as the new government lays out plans to improve the country's overburdened roads and bridges in next month's budget.
Fund managers are hoping the new government will bolster spending on infrastructure, remove policy bottlenecks by easing land acquisition rules and environmental clearances, amend labour laws and simplify procedures for project approvals.
While such expectations have helped infrastructure shares surge twice as fast as India's benchmark index since mid-May, a clear roadmap in the budget would further improve visibility and could convince the funds to pay even higher valuations.
Fund managers are also betting on a pick-up in earnings for such firms later this year, helped by lower interest rates and commodity prices and a revival in economic growth.
"Basically the opportunity is very big," said Sankaran Naren, equity chief investment officer at ICICI Prudential. All that is required is for everything to be lubricated properly. I am interested in clarity," Naren, who manages about $780 million in India's biggest infrastructure mutual fund, added.
Engineering firms Bharat Heavy Electricals (BHEL.BO), Larsen & Toubro (LART.BO), Crompton Greaves (CROM.BO) and Reliance Infrastructure (RLIN.BO), were among the 20 most popular stocks for domestic fund managers in May.
The shopping list also included construction firms Jaiprakash Associates (JAIA.BO) and Punj Lloyd (PUJL.BO), as funds sought exposure to sectors such as power and construction.
India's biggest fund firm, Reliance Capital, is raising money for a new infrastructure offering, while rival Tata Mutual Fund sought approval this month to launch its fourth such fund. SBI Funds Management, French insurer AXA (AXAF.PA), Sundaram BNP Paribas, Franklin Templeton and Deutsche Bank (DBKGn.DE) have also sought approval for infrastructure funds in June.
Fund managers are excited by the prospects for reforms after India gave the Congress-led coalition the most decisive election mandate in two decades, freeing it from the support of the Left and communist parties, which had stalled planned reforms.
India estimates it needs $500 billion over the five years to 2012 to upgrade its overwhelmed airports, potholed roads and inadequate utilities but has lagged in making critical reforms needed to do so, holding back potential gains for investors.
The sector suffered a blow last year as the economy slowed from 9 percent in 2007/08 to less than 7 percent and a global credit crunch starved infrastructure firms of funds.
But the gloom seems to be diminishing.
India is expected to expand at 8 percent in 2010, the fastest among major economies in the world, and 8.5 percent the year after, matching China's growth rate, according to a World Bank report released on Monday.
An improvement in growth prospects is likely to boost fund flows, especially to the high-beta infrastructure sector.
The sector could also get a lift later this week when the S&P CNX Nifty index shifts to a free-float market cap methodology, giving higher weight to some infrastructure stocks.
However, India faces plenty of execution risk [ID:nBOM475116].
"While there is always a fear of disappointment when expectations are very high, in our view, the government could focus on low hanging fruit and still deliver a lot," JPMorgan's (JPM.N) domestic fund unit said in its latest fact sheet.
HUGE POTENTIAL
Few would doubt the opportunity in domestic infrastructure.
India's peak power capacity is nearly 14 percent short of demand, while its transmission and distribution losses are a staggering 40 percent, according to Planning Commission data.
Only 2 percent, or 65,590 kilometres, of roads are national highways but carry 40 percent of traffic, while less than half of agricultural land is irrigated, it said.
Ports are running at 95 percent of capacity with demand rising at 10 percent annually, Tata Asset Management data showed.
But to grow at 9 percent India needs to invest 9 percent of its GDP to boost infrastructure from less than 6 percent now.
For a graphic on planned investment by sector, click here
"Achievements in the past five years will pale in comparison with what we will see in the next five years because of the scale at which these activities are going to be happening," said Sanjay Sinha, chief executive of DBS Cholamandalam Asset Management.
Infrastructure funds are the most popular in India by sector, with 18 of them managing nearly 160 billion rupees ($3.3 billion) at the end of May, according to fund tracker ICRA Online.
For a FACTBOX on Indian infrastructure funds' assets, performance and top-10 bets, click on: [ID:nBOM129837].
"This is a 10 to 20-year catch-up story, years of servicing and supplying, and then another cycle of upgrading and replacing," said Seth R. Freeman, chief investment officer of U.S. money manager EM Capital Management. (US$=48.53 rupees) (Editing by Muralikumar Anantharaman)
