The results to the Lok Sabha elections have provided a verdict for governance with clarity and stability - the first such in 25 years. The ministry-making process has also seen key ministries relating to infrastructure development -social, economic and human resource –go to persons who inspire confidence. These two aspects have provided hope that the process of tackling the economic slowdown and pursuing socio-economic development will get an impetus. What has been rejected – negativity of any kind - is also of significance.

What the election result has done is to provide a solid base at a higher level to what was and still probably is a bear-market rally. This has ensured that even if there are corrective phases, the lows of October 2008 have almost certainly been left behind for good. From present levels, if equity markets have deliver returns commensurate with risk, there must be tangible evidence of government policy that supports growth.

Given the strains on the fiscal deficit, the government has limited leeway in making any changes to taxes – income, excise, customs and services – and so is likely to focus on policy initiatives that give a renewed thrust to development of infrastructure. Fiscal constraints could, however, temper the scale and pace of the execution.

A boost to fast-tracking of power projects, building of roads & rail tracks, modernisation & expansion of power distribution networks, uplift of ports & airports and initiatives in areas such as irrigation, sanitation, renewable energy and education infrastructure are likely to figure prominently on the agenda. Such an approach plus enhanced focus & superior delivery of services through the National Identity Card (issued by 2011) will be the best way for the incumbent to consolidate on the 2009 vote as governance with an inclusive approach is getting rewarded. It is this backdrop that has transformed the expectation from sectors such as engineering, capital goods, services infrastructure builders and construction.

Tangible results may take time but improvement in order book and fund raising ability is the key aspect from an equity market standpoint. The infrastructure & capex spend story is likely to gather momentum. One of more reputed sell-side research outfits, CLSA, has published a report highlighting the $ 1 trillion spend likely in just the infrastructure space over the next decade. The outlays for the ongoing and next-five year plans according to the
Planning Commission are close $ 1.5 trillion and the $ 1 trillion number of CLSA appears to factor in slower pace of execution than government estimates.

Sundaram BNP Paribas Capex Opportunities aims to capture the benefits of the `India in Investment Mode’ story by investing in companies that provide/supply products and services to the capex/infrastructure spenders. The fund is a proven option with an impressive track record (refer table) for investors to participate in one of the two most significant pillars - the other is domestic consumption - of long-term India story.

Why is the focus on suppliers & providers of products and services to capex/infrastructure spenders and not the latter? It is because the revenue and earnings of these companies will capture the impact of the capex cycle at an early stage when the going is good. They also derive benefits without having to take big-ticket investment on the balance sheet, an aspect that is integral to capex/infrastructure spenders. This ensures that profitability parameters stay more robust and translate into higher valuation levels earlier for the stocks.

As beneficiaries of capex spenders, a focus on these companies fast tracks the process of playing the `India in Investment Mode’ theme for investors. In this respect, Sundaram BNP Paribas Capex Opportunities is distinct from the infrastructure funds from other fund houses.

An added advantage of this approach is the wider choice of potential investment candidates and the flexibility to own a more diversified portfolio than what one would associate with a thematic fund. This also means a sizeable allocation to mid and small-cap stocks and this enhances the risk profile.

Sudaram BNP Paribas Capex Opportunities is rated Four Stars by Value Research based on risk-adjusted returns over a two year period. This is significant since almost 15 months of this period was a tough environment for stocks tracking this theme. It reflects on the quality of fund management during the difficult period. The fund was also selected as the Best Diversified Fund for 2006 – CNBC TV1 CRISIL Award. These indicate its track record as a topquartile fund for investors when the infrastructure theme is robust.

Srividhya Rajesh is at the helm of affairs for Sundaram BNP Paribas Capex Opportunities. She is also the portfolio manager for Sundaram BNP Paribas Select Focus – Best Large-cap Fund in India in 2006 as well as in 2007 (CNBC TV18 – CRISIL Award) and ICRA Five Star Award for 2008. She has been with Sundaram BNP Paribas for more than ten years and is managing both funds since their launch. She brings rich experience to fund management having tracked markets and economy through several bullish and bearish phases. With a sizeable part of her fund portfolio oriented towards large-cap stocks, she keeps a close tab on macro-economic and sector trends.

- 3rd June 2009