The Hindu Business Line : ‘The long-term outlook is great for infrastructure stocks’

When we say infrastructure stocks have good potential, we are talking of large-cap stocks, to which we give 60-70 per cent weight. But there are some good stocks available in the mid- and small-cap space too.

SANJAY DONGRE, SENIOR FUND MANAGER, UTI MUTUAL FUND

Suresh Parthasarathy

With eight years of experience in various positions in UTI Mutual Fund, Mr Sanjay Dongre, Senior Fund Manager, currently oversees six equity schemes. Mr Dongre spoke to Business Line about the investment strategy of the funds he manages and the outlook for the infrastructure stocks over the medium and long term.

Excerpts from the interview:

Infrastructure stocks are undergoing high volatility of late. What is the potential for the funds that invest in such stocks?

If you look at infrastructure stocks from a medium to long-term perspective the outlook is great.

We do have a deficiency in our infrastructure and if we want to have achieve a 8 per cent growth and sustain it, it is obvious that we require infrastructure to handle the higher output which that GDP will produce.

There is no doubt, the government is doing it best in whatever way possible by initiating policy changes to promote infrastructure.

If you look at the sector for a 12-36 month perspective, then there is good return potential. But if you take a shorter term perspective then there are some concerns.

Infrastructure companies were not getting orders in the last six months mainly because of the elections, when decision making almost came to a standstill. The forthcoming quarters are likely to be better.

Within the infrastructure theme, what are the segments with good potential?

If you look at whole theme there are a whole lot of sub segments.

There are companies that manufacture power generation equipment, distribution and transmission companies; some are linked to capex expansion such as basic commodities suppliers.

There are contractors executing jobs and so on.

Once the spending takes place, the whole chain of players involved in that completion of the projects right from finalisation, implementation and execution are are going to benefit.

For example, once the project is finalised, then obviously those engaged in financing such IDFC, PFC and REC start dispersing the loan so these companies will benefit. Once the order is placed, construction companies will benefit. So there is a chain and it will be difficult to pinpoint any sub-segment.

When we looked at your portfolio over the past year, we found that exposures to cement and steel were low. Why is this?

We have 5-6 per cent exposure to cement in companies such as Grasim, Shree Cement and Century Textiles. There may be problem in classification of the sectors in the portfolio.

However if you look at our current portfolio due to market rally, this weight could be some where 7-8 per cent.

We were underweight in the steel sector. We had exposure only to SAIL and few other companies.

We where waiting for some improvement in steel prices before we embarked our exposure, as steel prices started to decline below $450 per tonne (now it’s quoting somewhere at $490).

The turnaround was not very visible in steel sector that is why we were very reluctant to take exposure.

Mid- and small-cap stocks have appreciated quite strongly from their lows. Are these now expensive?

Look at these stocks on a case by case basis, rather than generalise. When we say infrastructure stocks have good potential, we are talking of large-cap stocks. We will give 60-70 per cent weight to the large-cap stocks.

There are some good stocks are available in the mid and small cap space. In last two years the resilience of companies has changed. Some were able to withstand the financial crisis, but some had a lot of problems, which they continue to face.

The liquidity of the mid and small cap companies is poor and that makes for higher risk. If the stock is illiquid, one has to hold on to it for 18-36 months.

Why does the portfolio of your Contra Fund look more a diversified fund?

In Contra Fund, we invested in these stocks when they were out of favour. They then became the flavour of the market and today are in the limelight. You cannot exit these stocks unless you get some other contrarian stocks. Look at Bharti Airtel. Three years ago, it was a contra stock because of some of the schemes it launched.

It was underperforming the market for 4-6 months and at that point in time was quoting at Rs 350-400 levels. We picked up the stock then and are continuing with it.

When the three-year returns of UTI Master Plus, Contra and Leadership Fund were compared, they were identical. What is the distinction between these schemes?

When you look at returns for a three-year period, they may be identical; but they may be different if you compare year on year.

The Contra Fund, for instance, will under-perform sometimes and out-perform at other times because the contrarian stocks may become flavour of the market.

My point is that, if you are looking at the long term, then these may not be very different but over the short term, Master Plus and Leadership will outperform the Contra scheme. So, based on the time-frame, one has to take the call.

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