Mumbai/ Bangalore: Construction and engineering companies are set to produce the best returns for investors for a third year running as India pours more cash into building roads, airports and power plants, but their popularity has left some stocks with lofty valuations.
The stock market stars of three-eight years back—technology and software companies such as Infosys Technologies Ltd—will stay out in the cold as they are heavily exposed to a potential recession in the US.
Analysts and fund managers said a recent stock market slide, which has left the benchmark Bombay Stock Exchange’s (BSE) 30-share index, Sensex, down around 10% this month alone, has helped skim some of the froth from infrastructure stocks. They say builders, power equipment makers and engineers are relatively protected from any US downturn.
This is because the Indian economy is driven mainly by domestic demand, and rising incomes are boosting demand for everything from consumer goods to cars and houses, and companies are building new factories and expanding.
“If 1995-2005 belonged to IT, then 2005-2015 belongs to infrastructure,” said Ved Prakash Chaturvedi, managing director of Tata Mutual Fund, which runs two infrastructure funds worth $1.3 billion (Rs5,122 crore).
Infrastructure funds were the best performers for two years in a row, with four of the top 10 funds notching gains of 90% in 2007 following a more than 55% jump by six of the top 10 in 2006, data from fund tracking firm Lipper showed, outperforming the main BSE index’s 47% rise.
“It will be a predominant theme in 2008 also and should outperform the broader market,” said R. Rajagopal, chief investment officer at DBS Cholamandalam Asset Management Co. Ltd, who oversees $835 million in assets. The benchmark index is forecast to reach 22,000 points by end-2008, a Reuters poll showed in early December, up about a quarter from current levels.
Investments in construction and engineering companies by diversified equity funds almost doubled to $19 billion in 2007 and made up more than half their total equity assets of $37.5 billion, said fund tracking firm Icra Online Ltd.
The government has said India needs to invest $500 billion over the next five years to build infrastructure to help sustain an economy that is expanding at about 9% annually.
Fund managers believe the spending offers opportunities for the next few years, though many stocks in the sector are pricey. Companies such as India’s No.1 construction and engineering firm, Larsen and Toubro Ltd (L&T), and power equipment maker Bharat Heavy Electricals Ltd (Bhel) are expensive, but they do have an upbeat outlook.
“L&T remains one of the fundamentally best proxies to India’s infrastructure build,” Citigroup Inc. analyst Venkatesh Balasubramaniam wrote in a report, adding its earnings should grow more than 40% in the coming two years.
“You have to take a long-term view in this sector though some of the companies are expensively priced over their peers,” said Mugunthan Siva, chief investment officer at Optimix.
Nishant Kumar in Mumbai and Anshuman Daga in London contributed to this story.