Infrastructure will change India An open ended equity scheme April 2012
HDFC Infrastructure Fund HDFC Infrastructure Fund invests mainly in Infrastructure related companies Infrastructure sector broadly comprises 3 segments Asset Financiers: Banks and Infrastructure financing companies that provide debt finance to infrastructure projects e.g. SBI, IDFC, ICICI Bank, AXIS Bank, BoB, etc Asset Creators: Engineering and construction companies that manufacture equipment and build infrastructure projects (contractors) e.g. L&T, NCC, Punj Lloyd, ABB, Siemens, Crompton Greaves, etc. Asset Owners/ Developers: Companies that own infrastructure projects like roads, airports, power plants, ports, etc. e.g. NTPC, NHPC, Power Grid, GVK, Reliance Infrastructure, Adani Ports, etc HDFC Infrastructure Fund invests a minimum of 65% in the above categories P.S: HDFC Infrastructure Fund was launched as a 3 year closed ended equity scheme in February 2008, it was automatically converted into an open ended scheme from March 2011 Stocks referred above are illustrative and not recommended by HDFC Mutual Fund/ HDFC Asset Management Company Ltd. The Fund may or may not have any present or future positions in these stocks. 3
Performance of Infrastructure sector Need for infrastructure is large in India; need was not in doubt either earlier nor is it now 125 ~ 40% underperformance of Infrastructure sector visàvis Nifty Index However, the sector has performed below expectations both in terms of business growth and in equity markets over last few years Due to underperformance of the sector, earnings have been below estimates. This has resulted in lower Price to Earnings (P/E) multiples as well As a result, performance in equity markets of this sector has been disappointing in the last few years 100 75 50 25 Apr08 Jul08 Oct08 Jan09 Apr09 Jul09 Oct09 Jan10 Apr10 Jul10 Oct10 Jan11 Apr11 Jul11 Oct11 Jan12 CNXINFR Index NIFTY Index Source: www.nseindia.com Indices up to 30th March 2012 CNX Infrastructure Index includes companies from Asset Owners and Asset Creators categories, but has no representation from Asset Financiers 4
What has impacted the Infrastructure sector? Over last few years, progress in infrastructure development has been slower than originally anticipated The reasons for this are widely known: Issues on execution (land acquisition and environmental clearances) / Go NoGo Policy issues High financing cost: High fiscal deficit has led to high interest rates adversely affecting investments by Infrastructure companies which are highly sensitive to interest rates Poor sentiment in equity markets resulting in weak equity fund raising 5
Elephant Economy In India, things do happen but take more time Following table illustrates that things move slowly initially, however over time implementation accelerates Sector Particulars 8th Plan 9th Plan 10th Plan 11th Plan Remarks (FY9297) (FY9702) (FY0207) (FY0712) Power Generation Power Capacity Addition (MW) 16,423 19,015 21,110 53,922 Sector was opened to private sector in early 90's but introduction of Electricity Act, 2003, access to fuel and market prices of power led to significant jump in capacity addition only in 2007 2012 Sector Particulars FY01 FY03 FY05 FY07 FY09 FY11 FY12E Roads Roads Awarded (kms) 895 671 1305 1735 643 5083 7000 Roads awarded in FY 11 and FY 12 were more than the entire period from FY 2001 FY 2010 Telecom Average outgoing per minute (Rs.) Mobile Subs (mn) Mobile teledensity (%) 6.4 4 0.4% 3.2 13 1.2% 2.4 56 5.1% 1.2 162 14.3% 0.8 393 33.3% 0.5 812 67.1% 0.5 910 75.0% Though opened to private sector in mid 90's, growth picked up only after 2003 as Calling Party Pays and revenue sharing was introduced Last 5 years growth has been explosive; teledensity has gone up by 5 times in the last 5 years Source: Planning Commission of India, NHAI, TRAI, BoFA Merrill Lynch and internal estimates 6
Challenging environment should lead to change Current challenging environment for infrastructure sector is a result of: Challenges in land acquisition Problems in allocation / availability of natural resources i.e. Coal, bauxite, iron ore, etc High State Electricity Board (SEB) losses High interest rates Despite the underperformance by this sector, there are reasons to be optimistic It has been generally observed that most crises have in the past in India resulted in changes for the better 7
Elephants can dance too! The following changes have happened / announced in the budget which makes us optimistic for this sector PMO is directly involved in tackling issues in the power sector; contentious Go NoGo policy on coal mining scrapped, New standard bidding document with clause on fuel pass through on anvil and power companies are exempt from auction route for new coal blocks. ECB financing has been made cheaper by reduction in withholding tax on interest payments from 20% to 5% for 3 years The cascading effect of Dividend Distribution Tax (DDT) in a multitier corporate structure has been removed Import of coal made cheaper by reduction in import duties Tariff hikes and fuel/power procurement adjustment mechanism are a positive for SEBs the latest being a hike of 37% in Tamil Nadu The Budget proposals dated March 16, 2012 may change at the time the Budget is passed by the Parliament and notified by the Government. 8
Elephants can dance too! The proposed Land Acquisition Rehabilitation and Resettlement bill has been tabled in the Parliament in September 2011 Strong project pipeline and award activity from NHAI (ministry has recently set a medium term target of building 20 km of roads per day which will translate into ~ 7000 km for 2012) (km) 8000 7000 6000 5000 4000 3000 2000 1000 0 635 1735 2007 NHAI Activity Construction Awards 3359 2693 2205 1882 1780 1234 643 2008 2009 2010 5058 2011 1200 7000 2012 NHAI is finalizing standardized documents for EPC contracts to ensure greater transparency and faster award activity Source: NHAI and internal estimates Current budget has targeted a lower fiscal deficit 9
Is it time to invest in Infrastructure sector? Nature of equity markets Equities are a forward looking asset class Markets tend to overreact to both good and bad news / environment Besides earnings of infrastructure companies falling below expectations, P/E contraction has been sharp, resulting in sharp underperformance The last few years have been challenging for the infrastructure sector and current equity prices appear to be building in a lot of pessimism 10
Valuations of Infrastructure companies Sharp fall in valuations in last 4 years Asset Creators Asset Financiers Asset Developers/ Owners Company Name A B B Ltd. Simplex Infrastructure* BHEL Crompton Greaves Ltd. Larsen & Toubro Ltd. Punj Lloyd Siemens Ltd. Suzlon Energy Ltd. Axis Bank Ltd. Bank Of Baroda ICICI Bank Ltd.* IDFC PFC PNB SBI Union Bank Of India Adani Port G M R Infr GVK JPA* JSPL* PGCIL Reliance Infra Tata Power Co. Ltd. Price (Rs) 8Jan08 1496 672 499 217 2166 549 1001 464 1069 452 1334 225 255 683 2326 224 240 123 83 308 530 145 2536 157 FY13E EPS (Rs) 23 29 26 10 85 7 28 4 98 122 56 13 29 167 208 43 7 (0) 0 6 55 8 71 9 FY13E BV (Rs) 141 254 123 64 601 98 152 41 579 646 530 92 167 783 1,558 229 31 30 22 63 234 55 1,000 63 Price (Rs) 30Mar12 840 226 257 138 1,309 55 760 25 1,146 796 890 135 185 925 2,096 236 130 31 17 82 545 108 587 101 % change (44) (66) (48) (36) (40) (90) (24) (95) 7 76 (33) (40) (28) 35 (10) 5 (46) (75) (79) (73) 3 (25) (77) (36) P/E FY13E 37 8 10 13 15 8 27 7 12 7 16 11 6 6 10 5 18 N.A. 66 14 10 14 8 12 P/B FY13E 6.0 0.9 2.1 2.1 2.2 0.6 5.0 0.6 2.0 1.2 1.4 1.5 1.1 1.2 1.3 1.0 4.2 1.0 0.8 1.3 2.3 2.0 0.6 1.6 Source: Kotak Securities *Internal Estimates Stocks referred above are illustrative and not recommended by HDFC Mutual Fund/ HDFC Asset Management Company Ltd. The Fund may or may not have any present or future positions in these stocks. 11
Summary Despite the underperformance of infrastructure sector both in terms of overall growth and in equity markets, there are reasons to be optimistic Improving outlook on interest rates and focus of Government on infrastructure make long term prospects for this sector positive Markets appear to have priced in a lot of pessimism HDFC Infrastructure Fund is a thematic fund; therefore it carries higher risk than a diversified equity fund In view of the higher risk, exposure to this Fund should be controlled; we recommend exposure of < 10% of overall equity allocation to this category of funds* * In view of the individual circumstances and risk profile, each investor is advised to consult his / her professional advisor before making a decision to invest. 12
Product Features Type of Scheme Investment Objective Options An Open Ended Equity Scheme To seek long term capital appreciation by investing predominantly in equity and equity related securities of companies engaged in or expected to benefit from the growth and development of infrastructure The scheme offers investors two options: Growth Option Dividend Option with payout and reinvestment facility) Application Amount (Under Each Option) Entry / Exit Load Minimum Rs. 5,000/ and any amount thereafter. Additional Purchase : Rs 1000/ and any amount thereafter Entry Load: Not Applicable. Upfront commission shall be paid directly by the investor to the ARN Holder (AMFI registered Distributor) based on the investors' assessment of various factors including the service rendered by the ARN Holder. Exit Load: In respect of each purchase / switch in of units, an exit load of 1.00% is payable if units are redeemed / switched out within 1 year from the date of allotment. No exit load is payable if units are redeemed / switched out after 1 year from the date of allotment. Liquidity Benchmark Index Additional Benchmark Index Applications for subscriptions /redemptions/switches would be accepted at official points of acceptance on all Business Days at NAV based prices. AMC will declare NAV on all Business Days S&P CNX 500 S&P CNX NIFTY 13
Asset Allocation Pattern Under normal circumstances, the asset allocation of the scheme s portfolio will be as follows: Type of Instruments Minimum Allocation (% of Net Assets) Maximum Allocation (% of Net Assets) Risk Profile of the Instrument Equity and Equity Related Instruments of infrastructure / infrastructure related companies 65% 100% Medium to High Equity and Equity Related Instruments of companies other than mentioned above 0 35% Medium to High Debt Securities and Money Market Instruments* and Fixed Income Derivatives 0 35% Low to Medium Exposure to Derivatives <= 20% of the net assets Exposure to Foreign Securities: <= 35% of the net assets *Investment in securitized debt shall not normally exceed 30% of the net assets of the scheme. 14
Disclaimer/Risk Factors DISCLAIMER: This document has been prepared by HDFC Asset Management Company Limited ( HDFC AMC ) on the basis of internal data, publicly available information and other sources believed to be reliable. Any calculations made are approximations, meant as guidelines only, which you must confirm before relying on them. The information contained in this document is for general purposes only. The document is given in summary form and does not purport to be complete. The document does not have regard to specific investment objectives, financial situation and the particular needs of any specific person who may receive this document. The information/ data herein alone are not sufficient and should not be used for the development or implementation of an investment strategy. The same should not be construed as investment advice to any party. The statements contained herein are based on our current views and involve known and unknown risks and uncertainties that could cause actual results, performance or events to differ materially from those expressed or implied in such statements. Neither HDFC AMC and HDFC Mutual Fund (the Fund) nor any person connected with them, accepts any liability arising from the use of this document. The recipient(s) before acting on any information herein should make his/her/their own investigation and seek appropriate professional advice and shall alone be fully responsible / liable for any decision taken on the basis of information contained herein. This document has been made available in confidence and may not be reproduced or disclosed to third parties or made public in any way with out the written permission of HDFC AMC. MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY. 15
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