Prudential ICICI Infrastructure Fund (PIIF) is a high risk - high return investment proposition. The fund will largely invest in equities from the infrastructure sector. However what distinguishes PIIF from a typical sector fund is its pervasive definition of the infrastructure sector. The fund house has taken the liberty of including sectors like banking & financial services among a host of others for defining its area of investment. Consequently the fund is likely to be less concentrated vis-ą-vis a typical infrastructure sector fund.
However PIIF is unlikely to offer investors the same levels of diversification as a diversified equity fund. Investments in only like-natured sectors (related to the infrastructure sector) will make the fund a high risk investment proposition. PIIF will make a good fit for investors who have a view on the infrastructure sector; also a high risk appetite is a prerequisite.
With regards to the opportunity that the infrastructure sector provide at present, here is a view from our sister portal Equitymaster.com,
1. Deregulation benefits in the power sector:
Power sector contributes the largest to the engineering companies' revenues. For instance, ABB and BHEL derive 60% and 69% of their revenues from supplying equipments to the power sector. And with the government clearing the blueprint for adding 100,000 MW in the tenth (2002-07) and eleventh (2007-12) five-year plans, the potential seems high for the engineering majors. Investors however, need to practice caution on this account, as the country has been 'consistent' in missing its targets of generation capacity additions in the past. For instance, while China, with a capacity of 380,000 MW adds around 30,000-40,000 MW per annum, the Indian power sector's average is just around 3,500-4,000 MW! Also, valuations factor in the growth prospects over the next two years adequately.
2. Government's increased focus on infrastructure development:
In the recent budget, the government had outlined an investment of Rs 100 bn (US$ 2.3 bn), through a special purpose vehicle, to finance infrastructure development in the country. While this is a step in the right direction, the corpus of investment outlined is not enough to match the growing needs of a developing country like India. In order to sustain a growth of 6%-7% in the long-term, we need to raise infrastructure spending to around 10% of GDP, or US$ 50 bn per year! If this were to happen, investors in engineering stocks will have more reasons to cheer.
'While the above factors enthuse us to be buoyant on the Indian engineering and power companies, the same is not without its share of concerns. These include global slowdown, uncertainty about global commodity prices (inputs for companies), intensifying competition with new global entrants, and above all, the interference of politics in economics that has slowed down progress in the past.'
'Another factor for investors to consider is the fact that valuations of large and mid-size companies are already factoring in a lot of their future potential. So any investment in this sector has to be a long gestation one to benefit from this opportunity.'