A lot of money is waiting to come into the sector by way of FDI as well as equity participation in domestic IPOs. And there is room for more players.

Excerpts from the interview:

Your infrastructure fund is being launched in a scenario where there are already several other open-end funds playing this theme, in the market. What is the rationale for the launch at this point in time?

We feel the cake is big enough for everyone. We felt the need to add to our existing product line-up and investors too may like to add infrastructure stocks to their portfolio.

There is also a lot of money waiting to come into the sector by way of FDI as well as equity participation in domestic IPOs. This augurs well for the theme as a whole. More companies (in infrastructure) in the unlisted space will also take the equity route as companies will need an appropriate capital base and debt-equity mix to qualify for projects. We see the universe of companies available for this fund expanding sizeably over the years.

As to the closed-end structure, by nature, infrastructure investments have to be long-term. If you look at companies that are going to benefit from infrastructure, they are committing funds towards long-term projects, typically with gestation periods of a few years. So we feel that investors in this fund should come in with that perspective. Hasn’t much of that re-rating for infrastructure stocks already happened?

Valuations would certainly be a consideration when we select stocks. However, when I look at the infrastructure space, companies offer high earnings visibility because of their order book position.

Second, even today, the PEs are not much higher than the intrinsic growth rates projected. As long as these companies continue to enjoy a PEG (price earnings to growth) of less than 1, I think valuations are sane and we can continue to evaluate such companies for investment.

Some of the larger companies may be highly priced even from a PEG perspective….

Yes, they are. But if you look at the average for the sector, the PEG is still moderate. Typically in sunrise sectors, PEs do tend to be much higher in the initial years. We have seen this in the case of sectors such as telecom, where companies such as Bharti traded at much higher PEs in the early phase of their business than they do today. Therefore, we may pay a higher PE for sunrise sectors and monitor their performance closely thereafter.

Second, we will use a bottom-up approach and may buy companies from across the market-cap range. Third, we will approach the portfolio on a style-neutral basis, without any growth bias. There are enough value stocks available even in the infrastructure space. Several oil and gas companies are value plays today. If you look at oil marketing companies, no one can replicate their business overnight.

Further, these companies are integrated players. Yet their market valuations are impacted because just one of their businesses is impacted by policy intervention. These companies may offer good value today.

What impact will the proposed cap on overseas borrowings by companies have on infrastructure companies and on the growth prospects for the sector?

I would await greater clarity on the norms. But as of now, we have to look at this issue in terms of how this will affect the Triple-A rated corporates and the non-triple A-rated corporates. The External Commercial Borrowings (ECB) route was mostly favoured by Triple A-rated corporates who could borrow abroad at much lower interest rates. The latest guidelines on ECBs are obviously prompted by the abundant liquidity in the domestic markets.

This would allow credit growth to improve and reduce domestic liquidity, apart from supporting the rupee-dollar movements. It may also provide relief on the rupee to exporters who have been perturbed by the sharp appreciation that has been compressed into such a very short time frame. As for non triple-A borrowers, they have, in any case, not been active borrowers abroad. Therefore, I do not see a dramatic change in their situation.

Coming to infrastructure funding, I think this will not unduly affect any project. The funding for any infrastructure project is always a mix of debt and equity.

The debt-equity mix varies significantly from project to project and even between segments and is arrived at after considerable due diligence. Therefore, one need not worry unduly about interest costs impacting the project or returns on investment, because that is already factored into the funding mix.

External debt being a low-cost funding option, will the larger companies face an impact from higher interest costs?

Companies have better execution capabilities today and may be able to take a 1-2 percentage point increase in interest costs. Besides, large companies today are globalised and operate in different geographies.

The norms have clearly said that companies can borrow overseas for their operational requirements overseas. For domestic projects, funding costs may rise; but it will take time for costs to seep into the numbers and companies may, by then, be prepared to handle the challenge.

If you take the example of IT companies, most people said that the rupee appreciation will badly impact their balance sheets. But if you see the first-quarter results, large companies have managed to contain the impact through hedging programmes.

Large companies may thus have the means to source funds at moderate costs. They could examine options such as structured products that will be contracted at rates that are somewhere between the domestic and overseas rates.

What do you think of the recent bout of volatility in the stock markets? As a fund manager, how do you manage a situation where stocks witness such sharp swings?

Volatility is going to be the mainstay for any emerging market, especially for stocks. Stock markets are driven by two parameters. One is corporate fundamentals in that geography and the second is liquidity.

The second factor is uncontrollable. Fundamentals are also not controllable, but they are at least predictable for the fund manager.

With respect to liquidity, FII inflows into India this year have already hit the $8-billion mark, the threshold reached last year.

Because of the higher inflows, markets have been impacted positively (until recently). Generally, a concentrated flow of liquidity into the markets can add 3-4 per cent to its levels.

We have observed a high correlation between market levels and incremental liquidity flows, assuming fundamentals are constant. We think it is difficult to predict the absolute liquidity flows. But we do analyse and interpret data that is available in the public domain.

We track the correlation between incremental FII flows and market movements. More than twice the market volumes today are in the F&O (futures and options) segment; we believe this segment can no longer be ignored.

We also use data from this segment for cues. You can actually read global liquidity to an extent in the F&O markets, because FIIs take positions there.

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