Infrastructure Funds: Why should you invest in them?

India has set itself an ambitious goal of being a developed economy by 2047. To achieve this goal, a world class infrastructure is a prerequisite and not an outcome. India’s investment rate as measured by Gross Fixed Capital Formation (GFCF) to GDP was 29 per cent of GDP in FY23 as compared to China’s 42 per cent. Global experience suggests that in the high growth phase, this ratio has been 35-45 per cent for emerging economies during their transition to higher income economies. Thus, investment rates in India need to go up materially for it to improve its infrastructure and achieve its economic objectives. 

Good news is that due to a combination of various structural and cyclical factors, building blocks for a take-off in the investment cycle and hence a large-scale infrastructure build out in India are finally in place. 

Let us look at some of these drivers. 

Deleveraged private sector balance sheet: Post 2008, corporate sector was saddled with unsustainable debt due to a combination of global financial crisis, weak demand, over capacity and policy changes. The focus thus shifted from capex to deleveraging. However, balance sheets have now improved with corporate leverage at 15 year lows. Simultaneously, capacity utilisations have gone up, necessitating capex investments. There is a growing evidence of capex momentum across various sectors as can be seen in the fact that listed companies’ capex of FY23 is expected to have reached Rs 7.3 trillion which is a good 33% higher than FY20.

Domestic manufacturing push: Government’s focus on indigenisation of manufacturing has led to several steps like production-linked incentives (PLI), positive indigenisation lists in defence sector and other sector level interventions. These steps have led to large investment commitments in sectors like electronics manufacturing, consumer durables and defence.

Diversification of global supply chains: China+1, as the strategy is called, is proving to be a boon for India. Multinational companies are increasingly looking at India as a global supply hub and R&D centre. We have seen many global majors announce large scale investments in India.

Decarbonisation: Reducing reliance on fossil fuels is a global mega trend which is leading to large investments in renewable energy, e- mobility and green hydrogen. India has also committed to large investments like 500 GW of renewable power capacity by 2030 (5x vs. FY22) and 20% ethanol blending of petrol by 2025.

Government is also making significant efforts to localise the supply chains for these emerging sectors. PLI being one of the major incentives being offered. Large investment commitments have been made in sectors like renewable energy, green hydrogen, solar modules, lithium batteries and e-mobility.

Strong government commitment
towards capex: Over the past few years, we have seen a much more execution-focused and long term approach from the government towards capex. Hitherto underinvested sectors like railways (budgetary allocation towards railway capex in FY23 is Rs 2.5 trillion which is 5x that of Rs 500 billion in FY14), urban infrastructure and water have received major attention, while the government has ceded space to the private sector in ports, roads, power etc.

Infrastructure funds are set to potentially benefit the most from this expected upturn in the investment cycle. Most of these funds invest across sectors like power, roads, ports, cement, building materials, steel, oil and gas, engineering and construction, capital goods, logistics, property developers, infra financiers etc. Funds are hence well-diversified with growth rate of investments in India being the key underlying driver of fund performance. Given our positive view on the investment cycle, we believe that the medium to long-term outlook is very bright for infrastructure funds, and investors may consider investing in these funds.