Small Talk: New fund focuses on India's growing infrastructure sector

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The Independent Online

The other week, when we looked at Great Eastern Energy Corporation, we began by running over India's growth prospects. But besides driving energy needs, the expanding economy also calls for an overhaul of the subcontinent's infrastructure, which remains in a woeful state. Years of underinvestment have left a sorry legacy of, among other things, potholed highways – most of which are single-lane roads – and ancient airports that are bursting at the seams.

To be fair, things are changing. Until a few months ago, for instance, visitors flying into Delhi were greeted by an ageing terminal sharply incongruent with the stories celebrating the country's economic coming of age. Now, however, they glide into a gleaming structure with an array of smart duty-free shops and a rows upon rows of spanking new check-in desks. But despite the recent progress, much remains to be done. Just fly into India's financial capital, Mumbai, or drive down the broken arteries linking the big cities to the country's smaller towns.

It is against this backdrop, with the government pushing for new roads, airports and the like, that the financial services group Kotak Mahindra is launching a fund which will invest in the growing Indian infrastructure sector. The Kotak Indian Infrastructure Fund, a close-ended investment company which will be listed on the main market of the London Stock Exchange, will be open to both institutional and private investors, and will be managed by Kotak's Nitin Jain.

The fund's portfolio will consist of 40 to 60 companies active in areas from road-building and railways to telecoms and utilities. The opportunity is substantial, with the government bringing in more private players and earmarking some $1trillion (£620bn) to spend on the sector in coming years.

"The listed Indian infrastructure universe is broad, liquid and deep with over 360 listed entities having a market capitalisation of over $50m," Mr Jain said last week. "With the increased government spending, the sector is poised to for a valuation re-rating in the coming years."

The entry multiples certainly look promising. At about less than 20 times forward earnings, the sector valuations are below those of the wider Indian market, which trades on about 22 times.

Kotak itself knows India well, with nearly a quarter of a century of experience in managing assets in the country, and with around $11bn of funds under management or advisory. The Guernsey-domiciled fund is seeking to raise £100m through an institutional placing and a subscription offer for private investors. The prospectus is expected to be published this week, with Investec acting as global co-ordinator and book-runner.



Resource upgrade at African Eagle

Shares in African Eagle Resources closed at their highest level since 2007 last week. From about 13p at the start of trading on Monday, they finished at more than 15p on Friday. The surge was driven by news at the beginning of the week, with African upgrading Wamangola, the larger of the two nickel deposits at its Dutwa project in Tanzania.

The rally comes just weeks after analysts went down to visit the project last month, and rounds off a positive run, with the stock up by about more than 120 per cent since the beginning of December.

The resource upgrade, which saw more than three-quarters of the Wamangola deposit being put into the indicated category under the industry's regulatory norms, was the icing on the cake. The change means that the resources can be used to derive formal mineral-reserves data for the feasibility study, according to analysts.

As Seymour Pierce noted at the time, the revision by Snowden Group, African Eagle's independent geological contractor, was a "giant leap forward for the company", setting the stage for the pre-feasability study, which is due to for completion later.

The upgrade is only a first step, the broker added, suggesting that the miner was now likely to request Snowden to look beyond Wamangola to Ngasamo, the other deposit at the Dutwa site.

"The resource at Ngasamo Hill currently sits at 38.2 million tonnes, however any request to Snowden is likely to be coupled with results from the additional southern incline drilling programme, which we think could add a further 8 to 10 million tonnes to the resource base," Seymour Pierce said. Their counterparts at Fairfax were also pleased, saying: "The pace of work appears to be picking up and we look forward to the results of the processing tests, which will give greater confidence in the economics of Dutwa."

In another positive development, on Friday, the institutional investor MWB Limited increased its holding in African Eagle to just above 8 per cent. Clearly a good start to the year, then.



Snowfall hits Arena's profits

In the past couple of weeks, a number of retailers have issued updates detailing the troubles caused by the snowfall during December. But the impact went beyond the shops. On Friday, Arena Leisure was pressured after the racecourse operator said seven of its scheduled race meetings were abandoned because of the disruption caused by the snow.

That pushed the total number of abandonments owing to weather-related problems to 18 over the course of 2010. The company did, however, benefit from six additional meetings which were staged at short notice at its all-weather tracks. But nonetheless, Arena now reckons that the year's profits will be £300,000 to £400,000 lower than what management would have expected under more normal circumstances.

Though partially mitigated by a £100,000 gain related to the year-end revaluation of interest-rate-derivative contracts, the news sent Arena down by more than 4 per cent at one point during the day.

That said, analysts remained positive, with Altium urging investors to focus on development projects and a media rights contract which commences next year. "The impact on the group's valuation will be truly transformational," they said, no doubt warming the mood among holders.

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