Power is a sure-shot, defense promises growth, roads set for turn, railways risky: infrastructure manager with Rs 30,000 crore plus assets dissects the segment

Charanjit Singh, fund manager at DSP Mutual Fund.

Charanjit Singh manages funds of over Rs 30,000 crore through three funds, DSP TIGER Growth Fund, DSP Equity Opportunities Fund, and DSP Tax Saver's Fund. The Tiger Fund has been an exceptional performer for all periods from the past one year to 10 years, given that the stock market action has been around sectors riding on the ‘reform’ theme in recent years. The Equity Opportunities Fund has done better than the Nifty over the past two years but has been more or less in line with the index over long periods. But then again, the Tax Savers Fund, which constitutes nearly half of the AUM Singh manages, has done a better than the benchmark over all time periods. In a conversation with Moneycontrol, Singh spoke about opportunities in the infrastructure sector.

Edited excerpts :-

Market has made a comeback after the terrible Tuesday. Are investors still worried?

After a significant correction, a bounce back is natural. But the worry the market has is that with a coalition, only smaller-ticket reforms seem likely. Besides, that the government may shift focus from infrastructure and focus more on populist measures to address concerns on rural distress and job creation. Clarity will emerge after the budget is presented.

Which reforms are the markets really concerned about? Any that will have a direct bearing on stock performance, either way?

Not really. The concerns relate to legislative and judicial reforms; these won’t have an immediate impact on stock markets. Major reforms that impact domestic manufacturing, defense, and project execution are already in place. The next five years' focus will be on on-ground implementation and execution by companies.

Your take on the infrastructure segment of the market?

Central government capex for FY2024 was around Rs 9.5-10 lakh crores, but this year's budget was shortened due to elections. The central government’s four largest focus areas have been roads, railways, water, and defense. These will remain in focus.

One infrastructure area where your confidence is high.

Power generation and transmission equipment. The sector is driven by demand growth, not directly by government policies. As demand for power grows, there will be a need to ramp up power generation capabilities, as well as transmission and distribution. Power utilities, especially large PSU utilities, are still undervalued compared to private utilities. PSUs in power generation trade around 1.9 to 2 times price-to-book, whereas private utilities trade around 4 times. Besides, we like the transmission equipment makers because it is another area where growth is imminent.

Are you bullish on power financiers also?

Yes, power financiers are crucial as they specialize in funding generation, transmission, etc., for power companies. They are well-placed to capitalize on if the power sector continues to grow, requiring significant financing that general banks may not provide.

Where do you see excess valuations, and where do you see prices being reasonable?

Excesses are seen in sectors that are driven by narratives rather than immediate earnings, such as energy transition, manufacturing, and industrials. Increased domestic SIP flows chasing the same stocks are also resulting in inflated valuations. Besides, heightened retail participation is adding to volatility, especially in small and mid-cap stocks with low liquidity. Overall, capital goods stocks are valued on anticipated earnings growth, which can lead to overvaluation. On the other hand, construction and road infrastructure companies haven't seen significant re-rating due to weak road sector ordering last year. These companies could benefit from the new government's 100-day agenda. Similarly, power transmission contractors remain reasonably valued and may see re-rating.

Also read Have exited cap goods, PSU banks; consumption the big theme now: Quant MF’s Sandeep Tandon

How about railways and shipyard stocks?

Railway stocks have already seen one leg of re-rating. Future momentum depends on the new government’s priorities and spending. Indian shipyards have already seen a sharp rerating. A lot of re-rating has happened in some of the state-owned infra plays due to low initial multiples and new government orders. Future performance will depend on execution capabilities and competitiveness, making them potentially risky if order execution gets impacted.

How about the government-owned defense companies?

The two listed state-owned defense companies are monopolies. There is no other company in the same sector making fighter planes or helicopters. These companies have the highest order pipeline. Capability-wise they are doing JVs with international technology partners like GE. This means these companies will be very well placed to bag new orders and clock healthy earnings growth. While valuations have re-rated, their business models are very strong and are well poised for strong growth.

You think cement is a good play on the infra pack, or too overvalued?

A lot of supply is coming on stream and creating a tight pricing environment. Companies are thus focusing on cost rationalization to improve EBITDA margins. Post-elections, infrastructure momentum could pick up and drive prices, which could then lead to sector re-rating. The regional demand-supply dynamics could potentially spur consolidation as larger companies go out to acquire capacities.

Also read Funds tilted to momentum may have to tweak portfolio; Budget will be key: WhiteOak’s Khemka

Are there any pockets where you see deep value right now?

Deep value can be found in companies recovering from a rough cycle. For example, the housing improvement sector has been weak due to low entry-level demand and may see valuation re-rating and earnings growth as the real estate cycle picks up. There are also sectors like pipes, tiles, and cement, which have underperformed due to weak volumes and may now see traction if volumes and pricing improve.

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