Indian infrastructure a stronger theme post-budget: Kotak

Reuters

7 July 2009

Sees higher govt spending, easier funding as positives.
Terms Monday's stx fall, rise in bond yields over-reaction.
Expects corporate earnings rebound in financial year 2011.

Indian infrastructure has emerged a stronger investment theme post-budget on plans of higher government spending and improved external funding environment, a top strategist at India's Kotak Group said on Tuesday.

Alroy Lobo, who oversees about $2 billion as chief strategist and global head of equities for the asset management arm of the group, said he also favoured consumption given India's demographic advantage and thrust on spending in rural areas where most of its people live, but infrastructure remained his top bet.

"Infrastructure is clearly the bet I would like to place on," Lobo told Reuters in an interview.

"If you look at the infrastructure programme, they have seen massive increase in expenditure," he said, referring to the budget unveiled on Monday.

In his budget speech, Finance Minister Pranab Mukherjee promised greater flexibility to government-run Indian Infrastructure Finance Co. to fund projects and asked state governments for speedy implementation of projects.

The budget allocated 128.87 billion rupees for urban infra, 87 percent higher than a year-ago, and provided 39.73 billion rupees for housing and basic amenities to the urban poor.

It also raised spending for national highway development programme by 23 percent over 2008/09, set aside 10 billion rupees for irrigation projects and aimed to increase investment in infrastructure to more than 9 percent of the GDP by 2014.

"Even if you assume slippages and you assume it's not 9 percent but 8 percent, the sector is going to grow at a very strong pace in excess of 20 percent," Lobo said.

"Which industry will give you sustainable growth story of 20 percent plus?" asked Lobo, whose firm holds shares such as Larsen & Toubro (LART.BO: Quote, Profile, Research) and Bharat Heavy Electricals (BHEL.BO: Quote, Profile, Research).

He said the segment had contracted significantly in 2008 on fears a funding crunch would derail infrastructure projects.

Now, the pressure had eased and external commercial borrowing market revived, giving hopes that many projects, which were still on the drawing boards, will start getting executed.

"There is ample global liquidity which is wanting to find a place to rest," he said, adding India would be a major gainer given a strong government and easing geopolitical risks.

He said both the equity and bond markets over-reacted to the budget on Monday, with shares dropping nearly 6 percent and bond yields rising the most in three months, mainly due to projected fiscal deficit of 6.8 percent and higher borrowing programme.

But Indian shares' valuations look fairly attractive, Lobo said, adding he expected a major rebound in earnings for local firms in financial year 2011.

"When you look around the world, we are in a natural sweet spot and now we have got a very strong government," Lobo, one of whose infrastructure funds was among the world's top 100 performing stock funds in quarter to June, said.

Indian infrastructure a stronger theme post-budget: Kotak

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