Super Fund Manager 2024: How this fund manager is winning the infra game with 47% return in a year

What has helped your Infra Fund stand out this year?

Infra is cyclical, requiring an understanding of order momentum. In the last six to seven months, government orders slowed due to elections and ministry changes. This slowdown is understandable, but missing this larger trend could have been detrimental to returns. In GDP, investment involves government, private companies, and individuals through real estate. From 2010 to 2020, government, private sector, and real estate spending were dormant—the three key drivers of infrastructure spending.

Post-COVID, government capex revived growth, real estate recovered as people sought larger homes, and the private sector began investing.

Our portfolio is divided into order-driven businesses, consumables, and utilities for stability. As the government capex cycle began, we shifted towards order-driven businesses, creating alpha. Last year, our portfolio leaned on government-driven orders. This year, recognising election-related slowdowns, we tactically increased exposure to private-sector orders, which helped us stand out.

Which stocks have driven your growth this year?

A large portion of our growth this year came from the industrial sector, which comprises over 50 percent of our portfolio. Within this, defence was a significant play, though we reduced this allocation in 2024. Companies benefiting from private-sector capex, particularly in power, also contributed to our success. Automation and the PLI (Production-Linked Incentive) scheme have been big opportunities where we increased our allocation.

Why did you reduce your defence allocation?

We reduced our defence allocation, anticipating slower growth. Similarly, road contractors were a key holding three years ago, with about 15 percent of our portfolio invested in that segment. Today, it is less than 1 percent. Growth patterns can change, and it is important to adjust accordingly. These changes do not happen daily but evolve over several quarters.

How important has power been?

Power has been an important sector, especially post-COVID. A few years ago, India had surplus power, but demand grew rapidly, driven by factors like data centers, office spaces, and increased use of air conditioners due to global warming. India faced a power deficit, which was seasonal—surplus during the day and a shortage at night. The rapid growth of renewable energy sources, especially solar power in regions like Rajasthan and Gujarat, led to a mismatch in power supply and grid connectivity.

The big opportunity we identified was in transmission and distribution. Power Grid, for instance, had not been spending much, but its capex guidance increased significantly, aligning with our expectations. We also invested in companies like Transformers and Rectifiers, Hitachi Energy, ABB, and Siemens, all of which benefit from increased power capex.

How do healthcare and consumer discretionary fit into your portfolio?

We define infrastructure stocks based on government classifications. However, we also include companies that facilitate infrastructure. For example, hospitals like Apollo Hospitals and Max Healthcare fall within this category. We also invest in companies like Delhivery, a logistics partner, which plays a key role in infrastructure.

What is your sectoral allocation?

Industrial stocks make up 55 percent of the portfolio. Materials and utilities, which are entirely part of infrastructure, account for around 10 percent. We maintain a balance and adjust the weightings between these segments to avoid any drag on the fund's performance. For example, we avoid over-investing in auto ancillary companies linked to passenger vehicles, focusing instead on those linked to commercial vehicles (MHCVs), which are more infrastructure-focused.

What have been the surprises in the sector this year?

Power transmission and distribution (T&D) exceeded our expectations. Power Grid, in particular, significantly raised its capex guidance, leading to strong growth. However, the defence sector has been slower than anticipated. We expected a pickup in defence orders after the government took office, but the timeline was longer than expected. Within utilities, we have been disappointed by weaker-than-expected demand for power, which has led us to focus on segments that are still growing.

What is your outlook for 2025?

The key drivers for growth in infrastructure will continue to be investments as a component of GDP. The government is likely to continue its infrastructure spending due to the pressing need for development. Though 2024 saw some slowdowns in government orders, we expect the shortfall to be small by March 2025. Capital expenditure should continue to grow at a pace higher than revenue expenditure, a trend that has been consistent over the past four years.

For 2025, we expect companies benefiting from private-sector capex to continue driving growth. This will come through traditional companies expanding their capacities or through opportunities arising from PLI schemes. Companies like Dixon Technologies, which primarily assemble products for consumers, will also benefit from these opportunities.

Real estate has seen a resurgence, with unsold inventory getting absorbed and new inventory being created and sold. This will likely continue driving growth for the next few years. We will focus on order-driven businesses and, where value opportunities arise, within consumables and utilities.

How are you hedging your fund against risks in 2025?

This is the third year of strong performance for the fund. We have consistently tried to stay ahead of market trends by leveraging domain knowledge and recognizing business cycles early. For instance, our recognition of the power supply gap led us to increase our exposure to transmission and distribution stocks when they were trading at high valuations. While these stocks may seem expensive at times, we believe their earnings growth will remain strong, allowing us to benefit from them.

What are the key domestic risks for 2025?

One major risk is a shift in government spending priorities. If the government moves focus toward revenue expenditure to meet fiscal deficit targets, infrastructure growth could slow. Global economic uncertainty could also delay private-sector capex decisions. Additionally, while a strong commodity upcycle isn't anticipated, it could impact infrastructure companies' margins. Valuation risks also pose challenges, as overvaluation of stocks based on unrealistic growth expectations can lead to poor performance. For instance, we reduced our holdings in shipyard companies like Cochin Shipyard when their valuations became unsustainable.

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