The Hindu Business Line : ‘Infrastructure valuations still reasonable’

Are Indian markets stiffly valued? Will pockets of high valuation in the stock markets, such as infrastructure, perform? Mr Srinivas Rao, Senior Fund Manager of HDFC Asset Management, manager of the newly launched HDFC Infrastructure Fund, shared his views with Business Line on these issues.

Excerpts from the interview:

In recent weeks, we have seen the Indian market under-performing other emerging markets and Asian markets (except Shanghai). Could this be explained by India’s rich relative valuations? Is this being reset at lower levels?

The outlook for the Indian economy and corporate earnings remain quite positive. The economy is relatively insulated from the global slowdown as we are much less externally oriented and much more dependent on domestic consumption. As long as growth rates are higher and risks are lower, we believe India should trade at a premium.

The corporate capex cycle has been on for a couple of years now. What is your outlook on capex over the next couple of years?

We think overall, the corporate capex cycle will remain robust as many industries are still operating at full capacities and need to invest for expanding capacities. Second, quite a few mega projects are still at the nascent stage and actual spend is likely to happen in the coming years.

With interest rates seen to be peaking out, do you expect a decline in interest rates? What could be the impact of a benign interest rate scenario in India on corporate capex plans?

Softer interest rates would definitely help corporates and the infrastructure sector, but our sense is that given the robust economic activity, industry growth rates would continue to be healthy even without interest rate cuts.

HDFC Mutual Fund has generally stayed away from theme fund launches. Why have you now rolled out a thematic fund?

We have stayed away from sector funds as they face greater risk from lower diversification. However, infrastructure funds are not so narrowly focused. They invest across a wide variety of companies that are common beneficiaries of the huge infrastructure spend likely to happen in the coming years.

As infrastructure-related stocks have not declined to the same extent as the market, the sector remains among the pockets of high valuation within the market at this juncture. Will the sector be able to deliver high returns in this backdrop?

Infrastructure stocks have done very well in the recent past, led by very strong earnings growth, P/E re-rating of the sector and very high visibility for future growth. We feel we are at the beginning of the infrastructure roll-out and are likely to see continued growth for the foreseeable future. While valuations have risen, the growth opportunities are still reasonable and offer prospects for reasonable long-term returns.

A lot of expectations on infrastructure are built around the government’s increased outlays in the Eleventh Plan. How, in your view, will these be funded?

As can be seen from the approach paper to the Eleventh Plan, private sector share is expected to increase significantly in this period and we think funding should not be a problem for commercially viable projects.

(All opinions included in this Q & A constitute the author’s views as of this date and are subject to change without notice. The answers to questions are for information purposes only and not an offer to sell or a solicitation to buy units of HDFC Mutual Fund schemes.)

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