What caused the disappointment?

I believe the disappointment on the infrastructure sector in 2009 is because of the false hype or too much hype that was there in 2007 for this sector. And my belief is that through 2010 and perhaps till 2011 March, this is a sector where some people will continue to have doubts. The reason why people will have doubts is not because of any issues with the sector, but because of the kind of selling or rather the inflows into the schemes that was recorded in 2007.

When the financial crisis broke out, the criticality for the Indian government was to somehow continue with and kickstart consumption and not worry so much about infrastructure. So what they did was they increased the monetary stimulus and fiscal stimulus - which gave a wonderful uplift to the consumption sector. Now that has played out over the year 2009 and the data for January also shows that consumption still came out beautifully.

What will catalyse growth of this sector?

Now in my opinion, over the next few months with inflation becoming a concern, the government will reach a situation where they will in a manner tax the consumption sector and put that money into infrastructure sector.

We have to understand that because the government is still a key determinant of what happens in this sector nothing happens overnight. Things happen over a period of time - but we need to be patient. We were told for example, soon after the elections, that there will be a huge explosion of road orders - its taking its own time - those big orders are still in the pipeline - but we know that it is happening. In infrastructure sectors, because they are government driven, things will happen over a period of time and once they happen they will not necessarily get reversed.

What we expect is that there will be a lot of announcements on infrastructure projects between now and March 2011 - which will play in the financial years 2012, 2013 and 2014. People may get tired now because they are not seeing so much activity - but that will be a mistake. We do require power plants and roads and ports - and all of that will happen - but over time. People who disbelieve this theme are doing so probably because they paid too high a price for it in 2007.

Golden years will be 2011-2014 : invest in 2010 to reap the benefits

My belief is that the golden years for infrastructure will be 2011-12, 2012-13 and 2013-14. I would not worry about any short term abberations in some quarterly earnings numbers of some of the infrastructure majors.

I believe investors will get very good entry points into this sector between now and March 2011 - which will give very good performance over a 3 year period. And my belief is that people should start a 12-15 month SIP/STP on to our infrastructure fund now - and reap the benefits over the next 3 years.

The way I see it is that in 2007, these stocks were trading at 50 times trailing PE. Today, these stocks are trading at 20-25 times trailing. Perhaps by March 2011, they could be trading at 15 - 17 times trailing PE. What happens in this whole process is once the trailing P/E comes down the expectation from the sector is down.

Structuring the portfolio of ICICI Prudential Infrastructure Fund

To be honest, the sad thing is that we saw this PE de-rating coming and positioned ourselves relatively defensively for this - but our positioning didn't help us as much as what we hoped it would.

If you see our portfolio you will find a totally unconventional infrastructure portfolio, but it did not help the fund because we looked at some specific Oil & Gas sector names, specific telecom sector names, we increased holdings in power utilities - but sadly for us, even this kind of strategy did not help us. Our construction exposure was brought down significantly and we never had real estate. But, my sadness is that despite being aware that we are going to see this one year or so of tough times and positioning our fund accordingly, the fund still didn't do well.

Going forward, my base principle would be that by March 2011 I will have a much more aggressive fund. What I mean by aggressive fund is that I would have a higher position in capital goods. I would have a higher position in construction. These two sectors where I have cut down my exposure, I would have a much higher exposure there and some of these large strong companies which I have at the top of the holdings, I would see what I can do with them and what conversion I can do, because they were actually for defence. And when I see that the whole objective of defence has been achieved, I will move to a more aggressive portfolio that aims for higher returns.

Sectoral preferences within the fund

Actually there is something called a long term view and a short term view. On a short term view, I have been very cautious on the construction side for example. But if I take on the long term view, the sector where I have possibly most comfort at this point of time is telecom.

My belief is that over the next one to one and half year, I will become increasingly positive on construction and capital goods. The current cautious view will be reversed progressively.

My optimism on telecom is very simple. It is the only sector that is available at the cheapest trailing P/E today. It is available at 13-14 trailing PE. Whenever a sector is available at a such a low trailing P/E related to that of the market it means that most of the negatives are factored in. And everyone knows everyday that there is negative news and that is why it would be the sector where negatives are already priced in. Sectors with higher PEs could well be the ones where the negatives have not yet been priced in.

What can go wrong with the infrastructure theme?

Withdrawal of fiscal stimulus is one of the main catalysts for this sector to show higher growth. Once the Government withdraws the stimuli, it will have the necessary finances available to spend on infrastructure development - and that will result in a higher growth trajectory. If however, the Government decides to continue with the fiscal stimuli - we are not talking about the monetary stimuli - but the fiscal stimuli - like the lower excise duties, lower service tax etc - then, there will be a higher deficit pressure on the Government - which means big ticket infrastructure spending will be pushed back some more time. That would be a negative for the infrastructure theme.

The reason I am looking at a March 2011 timeframe for market's optimism to revive for this sector is because between now and March 2011, we will have 2 budget announcements - where we will hopefully see progressive steps towards removal of the fiscal stimulus packages which will consequently mean higher allocations towards infrastructure projects.