The portfolio is built around execution and capital efficiency. We do not prefer leveraged balance sheets. The macro environment is consolidating as the focus is on 'capital productivity' rather than 'large capex'. We continue to believe that the businesses which have lower leverage and execution track-record would go on to consolidate their respective space (whether asset owners or service/ancillary businesses). Such businesses would be able to aggregate profitable opportunities going into the next cycle by being able to absorb capital (whether equity or leverage).
Specific provisions of twin budgets (fiscal and railways)
The Union Budget 2014-15 was presented on 10th July 2014 by the Indian FM, while Railway budget was presented on 08th July 2014. Here's a list of specific points relevant to infrastructure sector (including railways) and their implications.
(a) The budget primarily seeks to increase the pool of capital available to the infrastructure sector by reducing financing costs and efficient taxation, thereby encouraging capital flow from banks and FDI and release capital from stressed assets. The relevant points are listed out as below -
- Banks will be permitted to raise long term funds for lending to infrastructure sector with minimum regulatory pre-emption such as CRR, SLR and Priority Sector Lending (PSL). However the specifics would be known only once RBI formalizes the operational aspects.
- Investment Trusts for infrastructure to get tax pass-through benefit similar to Real Estate Investment Trusts (REITs). This shall help monetization of existing investments and raise resources for new assets
- Capex threshold reduced to Rs 250 mn from Rs 1 bn earlier for availing additional investment allowance (higher depreciation rate of 15%)
- Tax on dividend from foreign subsidiaries continued at 15%.
- FDI cap in defense raised to 49% from 26% through FIPB route
- Proposed a complete "overhaul" of subsidy regime. However, no concrete steps/ timelines for subsidy reduction were announced.
- Extension of section 80IA benefit for upto 3 years. The 10 year tax holiday has been extended to the undertakings which begin generation, distribution and transmission of power by Mar-17.
- Six new Debt Recovery Tribunals to be set up.
- To give necessary impetus to the manufacturing sector, the eBiz platform aims to make all business and investment related clearances and compliances available on a 24x7 single portal.
Real Estate
- Necessary incentives and a conducive tax regime for REITs shall be provided
- Minimum area for FDI in real estate lowered (from 50,000 sq. mtrs. to 20,000 sq. mtrs.) and so also capital requirements (from $10 mn to $5 mn)
- Tax incentives on home loans increased (higher limits under Sec 24b and 80C)
Railway budget
- Recent tariff hike announced last month to provide additional revenue of Rs 80 bn
- Indian railways to explore alternative funding resources through investible surplus funds of railway PSUs
- Seeking cabinet approval for FDI in railways (except in railways operations)
(b) Further, budgetary allocations have been increased in certain key sectors for new infrastructure creation. The relevant points are listed out as below -
- Allocation for Defence spend raised to Rs2290bn (+12% yoy)
- Allocation of Rs378bn for NHAI and support to state highway projects, target of constructing 8500km of national highways and allocation for Rs5bn for project preparation for expressways
- Allocation of Rs 116 bn to set up 16 new ports
- Allocation for Railways increased to Rs 477bn
- Municipal Debt Facility raised to Rs 500 bn from Rs 50bn earlier over five years for public transport, solid waste disposal, sewerage treatment and drinking water in the urban areas
- Seek to strengthen connectivity of gas network in India, 15,000 kms of new pipelines to be constructed which will likely lead to an investment of ~Rs600bn
- Allocation of Rs. 7,060 cr for the project of developing '100 smart cities'
- Allocation for Rs. 2,037 cr for Integrated Ganga Conservation Mission "NAMAMI GANGE"
Real Estate
- Allocation for NHB (National Housing Bank) increased to Rs. 8,000 crore to support Rural housing.
Railway budget
- Planned capex of Rs 645 bn in FY15 vs. Rs 582 bn
- Plans to award new lines for linking 7 ports under PPP mode
- Dedicated Freight Corridor to award 1,000 kms of civil construction works at a cost of Rs 200 mn/km in FY15
Other key schemes in fiscal budget
- Pradhan mantri krishi sinchayee yojana to promote access to irrigation
- SP Mukherji Rurban mission to deliver integrated project based infrastructure in the rural areas
- Deendayal Upadhyaya Gram Jyoti Yojana for feeder separation will be launched to augment power supply to the rural areas and for strengthening sub-transmission and distribution systems
- A National Industrial Corridor Authority, with its headquarters in Pune, is being set up to coordinate the development of the industrial corridors.
- Special Economic Zones (SEZs) to be revived
- Scheme for development of new airports in Tier I and Tier II Cities to be launched
- Ultra-Modern Super Critical Coal Based Thermal Power Technology to be explored
- Ultra Mega Solar Power Projects proposed in 4 states
Our View
As outlined above the twin budgets (fiscal and railways) 2014-15 underscore two important aspects:
(1) Immediate focus on execution – increase flow of capital, reduce financing costs, free-up capital from stressed assets, encourage private participation through REITs/liberal FDI policies and address bank funding issues through SLR/CRR relaxation, further accompanied by smooth execution through a hassle-free administrative and legislative structure.
(2) Capacity building for long term infra creation – undertake structural reforms and build capacity, as evident from multiple schemes undertaken (outlined above) and setting aside money for numerous studies or preparatory work for big projects expected to be announced later during NDA tenure.
The new government seems to be embarking on a 'capital productivity cycle' before it would want to accelerate the 'capex cycle', as the economy continues to be in a transition mode where 'stalled projects' have hit a peak while 'new project announcements' have hit a trough. The key beneficiaries would be the balance sheets that can absorb flow of capital, deliver on execution, complete projects and consolidate in the environment.
Accordingly, there is no structural change in portfolio stance, as the unfolding of macro environment and budgetary aspects are consistent with our stance.
Portfolio
The IDFC Infra portfolio is built to monetize the infrastructure opportunity in the country. We expect that companies with a dominant market share and higher visibility of cash flows would consolidate the space going forward. The current portfolio represents our version of the companies which will dominate- the Power segment, the Telecom industry, the Energy and Infrastructure businesses.
Equity holdings as on 30th Jun 2014
Company | Industry | (%) NAV |
Larsen & Toubro Ltd | Construction Project | 20.55% |
Bharti Airtel Ltd | Telecom - Services | 9.47% |
Power Grid Corporation of India Ltd | Power | 6.85% |
Container Corporation of India Ltd | Transportation | 5.35% |
Siemens Ltd | Industrial Capital Goods | 5.10% |
Engineers India Ltd | Construction Project | 4.57% |
JSW Energy Ltd | Power | 4.44% |
Cummins India Ltd | Industrial Products | 4.13% |
Mangalore Refinery and Petrochemicals Ltd | Petroleum Products | 4.11% |
Adani Ports and Special Economic Zone Ltd | Transportation | 4.05% |
Tata Power Company Ltd | Power | 3.69% |
Bharti Infratel Limited | Telecom - Equipment & Accessories | 3.58% |
Ultratech Cement Ltd | Cement | 2.99% |
Idea Cellular Ltd | Telecom - Services | 2.80% |
PTC India Ltd | Power | 2.55% |
CESC Ltd | Power | 2.39% |
KSK Energy Ventures Ltd | Power | 2.09% |
Gujarat State Petronet Ltd | Gas | 1.93% |
Reliance Industries Ltd | Petroleum Products | 1.88% |
Alstom India Ltd | Industrial Capital Goods | 1.37% |
Indian Oil Corporation Ltd | Petroleum Products | 1.28% |
Sector Allocation
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MUTUAL FUND INVESTMENTS ARE SUBJECT TO MARKET RISKS, READ ALL SCHEME RELATED DOCUMENTS CAREFULLY.
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