For those who see high returns from infra funds last year(65-70%) and get worried whether its too late to invest, Bhavin sets the longer term context: infra as a theme has started performing after a 15 year slumber since its last peak in 2008. It has a long catch up to do with the market which has in these 15 years delivered 12%+ CAGR while infra has only delivered 3% CAGR in this period.
In this infra cycle, in addition to Government thrust on infrastructure, there are two other huge secular drivers: energy transition and data explosion – both of which require huge investments in electrification and construction.
Additionally, capex intensive sectors including aerospace, defence, electronics, railways etc have long growth runways ahead –making the overall infra theme very broadbased.
Valuations may look high from historical standards, but strong growth prospects adequately justify them.
Bhavin manages the SBI Infrastructure Fund with an active bet size of over 70% - which is substantial for a thematic fund. He says lessons from the last cycle have taught him not to get benchmark focused when the benchmark has 3 stocks that account for half the weight. He keeps his fund well diversified across sectors within the theme to drive alpha as well as protect against steep drawdowns.
Cement is a sector Bhavin particularly likes – it is central to the big real estate, construction and infra boom, the sector has seen sharp consolidation with the top 5 players now controlling 60% market share and the top 3 players are in the midst of an expansion phase supported by strong balance sheets which will help them deliver mid-teens volume growth in the coming years.
Power distribution is another favourite for him – the sector is witnessing de-licensing though it continues to be strongly regulated. Companies are delivering mid-teens growth with strong RoEs, which allows them to expand without capital dilutions, thus bolstering RoEs further.
Key risks to the infra theme include policy risk and promoter risk. Any change in Government policy and thrust towards infrastructure (doesn’t look likely) can be flagged as one risk. Reckless expansion and misallocation of capital (we saw this in the last cycle of 2003-2008) can derail stocks –this too appears unlikely in most part, given the lessons learnt from the past cycle. The only pockets Bhavin is a little concerned on promoters’ over-exuberance is where they have a single buyer (Government) and are getting carried away with recent orders and extrapolating this into the distant future (this could include some suppliers in the defence and railways areas).