DSP TIGER Fund is roaring on the return charts with around 77% returns. Infrastructure as a theme continues to reward mutual fund investors in one year. The scheme’s fund manager, Charanjit Singh, tells CNBC TV18 that the infrastructure theme continues to have a strong outlook, with sectors like railways, Power and defence getting a big push from the Government of India.
DSP TIGER Fund is roaring on the return charts with around 77% returns. Infrastructure as a theme continues to reward mutual fund investors in one year. The scheme’s fund manager, Charanjit Singh, tells CNBC-TV18 that the infrastructure theme continues to have a strong outlook, with sectors like railways, Power and defence getting a big push from the Government of India.
DSP TIGER Fund is among the top performers in its category. What has been the strategy for this performance?
DSP TIGER Fund is a thematic fund that has exposure to multiple sectors that are core to the economy. Understanding the turn in the investment cycle for the thematic funds to do well is critical. Our detailed analysis of various sectors regarding demand-supply, policy reforms and global trends has helped us establish the turning points in the investment cycles of multiple sectors.
Our critical calls on the sectors such as Defence, Power, Railways, Water and Manufacturing helped us pick the right stocks ahead of time and then ride the cycle.
For the defence sector, key data points of our suppliers, Russia and Israel, at war, Chinese aggression and the banning of imports by the Government helped us build a positive view on Defense PSU, which was trading at a low PE multiple of 10x.
In the power sector, our demand-supply model indicated that power demand growth, which had been at an average of 5.5% over the last decade, was set to rise post covid due to increasing penetration of ACs, rising industry capacity utilizations and new loads coming on the grid such as data centres. Power utilities were available below 1x PB(Price to Book), and most equipment players were available at 20-25x PE multiples.
Manufacturing as a percentage of GDP has been struggling at 18% for India. In comparison, for other Asian countries, it is much higher at more than 20%. With a rising skilled workforce, supply chain disruptions and the China +1 strategy, India could scale up the manufacturing sector. Additionally, the Indian government brought in a vital policy of production-linked incentives, which helped us gain a decisive view of the manufacturing sector pick up in India.
Our strategy of picking big themes with large addressable markets, ignored by the markets due to the weak cycle of the last 10 years due to lack of capex and ability to see the impact of significant policy reforms, have been critical factors of success. We have captured the sector at the turning points when valuations were cheap. Also, patience while the theme pans out is necessary regarding how long the investment cycle will last. It is imperative to hold the stocks through the cycle.
Infrastructure as a sector is in focus with a big push from the Government. What are the things working for the industry?
We see that the texture of the Indian economy is shifting from consumption-driven to more capex-driven. As job creation takes centre stage for any government, the initiatives to drive consumption through job creation become essential. Indian Infrastructure sector had been struggling post-global financial crisis as demand collapsed, over-capacity impacted many industries and policy paralysis continued till 2012. Post-2014, we witnessed policy paralysis getting resolved in terms of environment clearance of projects and land acquisition issues.
Also, the central Government took the lead in driving the capex from FY21, which has continued till FY24—the increased spending on capex to 3.3% of GDP in FY24 from 1.7% avg. FY09-FY20 was mainly focused on railways, roads, defence, and water.
The power sector is witnessing a revival in capex led by rising demand growth of 7%, which is expected to be upgraded further in the long term.
There are specific sectors in demand, such as defence, power, manufacturing, and water, where we need to spend as there is no option.
DSP TIGER Fund is a thematic fund that has exposure to multiple sectors that are core to the economy. Understanding the turn in the investment cycle for the thematic funds to do well is critical. Our detailed analysis of various sectors regarding demand-supply, policy reforms and global trends has helped us establish the turning points in the investment cycles of multiple sectors.
Our critical calls on the sectors such as Defence, Power, Railways, Water and Manufacturing helped us pick the right stocks ahead of time and then ride the cycle.
For the defence sector, key data points of our suppliers, Russia and Israel, at war, Chinese aggression and the banning of imports by the Government helped us build a positive view on Defense PSU, which was trading at a low PE multiple of 10x.
In the power sector, our demand-supply model indicated that power demand growth, which had been at an average of 5.5% over the last decade, was set to rise post covid due to increasing penetration of ACs, rising industry capacity utilizations and new loads coming on the grid such as data centres. Power utilities were available below 1x PB(Price to Book), and most equipment players were available at 20-25x PE multiples.
Manufacturing as a percentage of GDP has been struggling at 18% for India. In comparison, for other Asian countries, it is much higher at more than 20%. With a rising skilled workforce, supply chain disruptions and the China +1 strategy, India could scale up the manufacturing sector. Additionally, the Indian government brought in a vital policy of production-linked incentives, which helped us gain a decisive view of the manufacturing sector pick up in India.
Our strategy of picking big themes with large addressable markets, ignored by the markets due to the weak cycle of the last 10 years due to lack of capex and ability to see the impact of significant policy reforms, have been critical factors of success. We have captured the sector at the turning points when valuations were cheap. Also, patience while the theme pans out is necessary regarding how long the investment cycle will last. It is imperative to hold the stocks through the cycle.
Infrastructure as a sector is in focus with a big push from the Government. What are the things working for the industry?
We see that the texture of the Indian economy is shifting from consumption-driven to more capex-driven. As job creation takes centre stage for any government, the initiatives to drive consumption through job creation become essential. Indian Infrastructure sector had been struggling post-global financial crisis as demand collapsed, over-capacity impacted many industries and policy paralysis continued till 2012. Post-2014, we witnessed policy paralysis getting resolved in terms of environment clearance of projects and land acquisition issues.
Also, the central Government took the lead in driving the capex from FY21, which has continued till FY24—the increased spending on capex to 3.3% of GDP in FY24 from 1.7% avg. FY09-FY20 was mainly focused on railways, roads, defence, and water.
The power sector is witnessing a revival in capex led by rising demand growth of 7%, which is expected to be upgraded further in the long term.
There are specific sectors in demand, such as defence, power, manufacturing, and water, where we need to spend as there is no option.
The nature of this sector is changing from pure infrastructure to more manufacturing-oriented. With import bans on multiple products, the manufacturing capacities will ramp up. Also, numerous new areas are opening up in the economy, such as green energy transition, solar module manufacturing, battery manufacturing, hydrogen ecosystem, etc.
The last five years were for critical reforms by the government and policy changes. The following five years, from FY25-30, will be about execution. Also, private capex, which had been weak for a long time, could witness a revival from FY26 led by rising utilization levels, strong corporate balance sheets and political stability.
What is the outlook for the sector?
We maintain a positive outlook on the infrastructure/manufacturing theme as most segments are at the cusp of a significant pickup in demand, which would drive company earnings growth. We are witnessing companies adding capacities to meet the increased demand as supply has not kept pace.
The entire value chain in Power, which includes utilities, contractors, and equipment suppliers (like transformers, cables and wires), would witness a robust demand environment till FY30. This would also lead to an improved margin profile as pricing power comes back.
The Defense sector is at a similar level to the Auto manufacturing sector 15 years ago, with a long runway for growth. As we develop the domestic ecosystem, companies will keep getting bigger. We are witnessing technology transfers from developed markets to the defence ecosystem. Also, defence exports could be viable as India scales up its domestic ecosystem.
Railways will continue to see significant investments as we look to lower our logistics cost from 14% to 7%. Also, we would require new corridors for energy, port connectivity, and decommission.
Water as a sector is becoming a priority due to the rising scarcity of water. After the formation of the Jal Shakti ministry in FY19, the water sector received an increased budgetary allocation from the centre and multiple initiatives to build the water infrastructure, such as water treatment, sewage treatment, and tap water for households.
The government announcement of a 100-day agenda will set the stage for various sectors in the second half of FY25. Post that, and we believe the Government’s announcements of the Viksit Bharat Program in Dec 2024 will give good visibility for all the core sectors till 2047 with a roadmap for the medium and long term.
This infra/manufacturing cycle would be 5-8 years long, much longer than the previous cycle. Also, many new sectors absent in the last cycle have been added. While we are positive on the demand outlook for the core sectors, we remain in excess of valuations in pockets; any disappointment in order inflow growth or weakness in private capex or government capex could derate the stocks. Hence, we prefer a thematic approach with exposure to multiple sectors over sectoral funds.
Regulatory changes, project delays, and capital-intensive nature have been the sector’s concerns. What are the other headwinds for the industry?
The Indian infrastructure sector has undergone a learning curve over the last 10 years regarding project execution, tendering process, land acquisition and working capital cycles. Companies have become more disciplined in avoiding unrelated diversification, avoiding asset ownership, and focusing on working capital. The companies that have been disciplined have been able to survive. At the same time, many perished during the challenging phase of the market.
The regulatory environment is very conducive, and the government is keen to ensure that ease of doing business becomes a priority.
Fundamental headwinds would be rapid technological changes, the ability to cope with change, and the availability of cheap capital, timely execution, and a skilled workforce. We need to rapidly push the skilling of human resources to train them for the new manufacturing sectors coming into India and improve efficiency.
Investors are getting into the funds and seeing bumper returns. What is your advice to the existing and new investors?
We advise investing in thematic funds, which are more diversified and not sectoral funds, which could have limited exposure and thus be at high risk. Also, the thematic funds could be a satellite portfolio with a staggered 10-15% allocation. Investors should have a 5-year horizon when investing in this theme. The investment cycle is picking up for existing investors, which is expected to be favourable for this theme; hence, they remain invested. Avoid falling for narratives and focus on the core businesses which have survived the downcycle.
The last five years were for critical reforms by the government and policy changes. The following five years, from FY25-30, will be about execution. Also, private capex, which had been weak for a long time, could witness a revival from FY26 led by rising utilization levels, strong corporate balance sheets and political stability.
What is the outlook for the sector?
We maintain a positive outlook on the infrastructure/manufacturing theme as most segments are at the cusp of a significant pickup in demand, which would drive company earnings growth. We are witnessing companies adding capacities to meet the increased demand as supply has not kept pace.
The entire value chain in Power, which includes utilities, contractors, and equipment suppliers (like transformers, cables and wires), would witness a robust demand environment till FY30. This would also lead to an improved margin profile as pricing power comes back.
The Defense sector is at a similar level to the Auto manufacturing sector 15 years ago, with a long runway for growth. As we develop the domestic ecosystem, companies will keep getting bigger. We are witnessing technology transfers from developed markets to the defence ecosystem. Also, defence exports could be viable as India scales up its domestic ecosystem.
Railways will continue to see significant investments as we look to lower our logistics cost from 14% to 7%. Also, we would require new corridors for energy, port connectivity, and decommission.
Water as a sector is becoming a priority due to the rising scarcity of water. After the formation of the Jal Shakti ministry in FY19, the water sector received an increased budgetary allocation from the centre and multiple initiatives to build the water infrastructure, such as water treatment, sewage treatment, and tap water for households.
The government announcement of a 100-day agenda will set the stage for various sectors in the second half of FY25. Post that, and we believe the Government’s announcements of the Viksit Bharat Program in Dec 2024 will give good visibility for all the core sectors till 2047 with a roadmap for the medium and long term.
This infra/manufacturing cycle would be 5-8 years long, much longer than the previous cycle. Also, many new sectors absent in the last cycle have been added. While we are positive on the demand outlook for the core sectors, we remain in excess of valuations in pockets; any disappointment in order inflow growth or weakness in private capex or government capex could derate the stocks. Hence, we prefer a thematic approach with exposure to multiple sectors over sectoral funds.
Regulatory changes, project delays, and capital-intensive nature have been the sector’s concerns. What are the other headwinds for the industry?
The Indian infrastructure sector has undergone a learning curve over the last 10 years regarding project execution, tendering process, land acquisition and working capital cycles. Companies have become more disciplined in avoiding unrelated diversification, avoiding asset ownership, and focusing on working capital. The companies that have been disciplined have been able to survive. At the same time, many perished during the challenging phase of the market.
The regulatory environment is very conducive, and the government is keen to ensure that ease of doing business becomes a priority.
Fundamental headwinds would be rapid technological changes, the ability to cope with change, and the availability of cheap capital, timely execution, and a skilled workforce. We need to rapidly push the skilling of human resources to train them for the new manufacturing sectors coming into India and improve efficiency.
Investors are getting into the funds and seeing bumper returns. What is your advice to the existing and new investors?
We advise investing in thematic funds, which are more diversified and not sectoral funds, which could have limited exposure and thus be at high risk. Also, the thematic funds could be a satellite portfolio with a staggered 10-15% allocation. Investors should have a 5-year horizon when investing in this theme. The investment cycle is picking up for existing investors, which is expected to be favourable for this theme; hence, they remain invested. Avoid falling for narratives and focus on the core businesses which have survived the downcycle.