CPSE ETF Further Fund Offer: A Review

The government plans to garner up to Rs 6,000 crore by selling units of the CPSE ETF by launching a follow on public fund offer which opens on 17/01/2017. CPSE stands for central public sector enterprises, and ETF for exchange-traded fund. CPSE ETF is a basket of 10 public sector undertakings where the government had sold shares in small quantities way back in May, 2014. An ETF, or exchange-traded fund, is a marketable security that tracks a basket of assets such as stocks. In contrast to mutual funds, it trades like a stock. A 5% upront discount has been offered to lure investors to invest in this fund. While the past performance of CPSE ETF funds is reasonably good, there are many red flags that an investor has to keep in mind while investing in this CPSE ETF Further fund offer(FFO). The review of this offer is aimed to held investors take an informed decision.

RELATED POST: CPSE ETF: Run up to the Issue 

Present CPSE ETF FFO(Further Fund offer)
  • FFO Application:  Opens on 18/01/2017 ; Closes on 20/01/2017
  • Allotment & Listings: 20 days for allotment &  Listing i.e. by 10th Feb, 2017
  • Issue Size: Rs 4,500 crore with a green shoe option of Rs. 1,500 crore
  • Managed by Reliance Nippon Life Asset Management
  • An upfront discount of 5% is  being offered to all category of investors.on the “ CPSE ETF FFO Reference Market Price”.
  • Investment in CPSE ETF scheme qualifies for deduction under Rajiv Gandhi Equity Saving Scheme (RGESS) and thus of 50% of the investment  amount can be deducted from the taxable income under the Section 80 CCG of the Income Tax Act.
  • The Fund is being managed by Reliance Nippon Life Asset Management Limited (RNLAM) which had been managing the fund by virtue of their taking over Goldman Sachs who were initially manages to the fund when it was launched way back in 2014.
  • The Scheme invests at the minimum  95% of its total assets in Nifty CPSE Index stocks and can at the maximum invest 5% in Money Market Instruments like include T-Bills, CP (commercial paper) etc.

Background of CPSE ETF Scheme & Valuation Methodology: 

CPSE stands for central public sector enterprises, and ETF for exchange-traded fund. CPSE ETF is a basket of 10 public sector undertakings where the government had sold shares in small quantities when CPSE ETF’s New Fund Offer (NFO) was first launched in March, 2014 with an issue size of Rs. 3,000cr. The NFO received good response. The ETF was listed on 4th April, 2014. The ETF was launched by Goldman Sachs Asset Management (India) which was later acquired by Reliance Mutual Fund in October 2015.
The scheme tracks CPSE Nifty index which was formed on 1st January 2009 with a base value of 1000. The CPSE ETF scheme comprised of 10 selected PSUs (Maharatna and Navratnas) and were selected on investor friendly criteria. List included ONGC, Coal India, Oil India, IOC, Gail, Container Corp., Bharat Electronics, Engineers India, Power Finance and Rural Electrification. It also had a loyalty addition as well as bonus attractions. Selections of these companies were done on following characteristics:

  • Having more than 55% government stake
  • Average free float market capitalization of more than Rs.1,000 crore for six month period ending June 2013
  • Having paid dividend of not less than 4% including bonus for 7 yrs immediately preceding or for at least seven out of the eight or nine years immediately preceding, are considered as eligible companies as on cut-off date i.e. 28-Jun-2013.

CPSE ETF, tracks NIFTY CPSE Index constituting 10 central public sector enterprises. CPSE ETF Composition as on December 30, 2016 is as follows:

Sno Company Name % Weight
1 ONGC 24.51
2 Coal India 20.68
3 Oil India 3.41
4 IOC 18.08
5 Gail (India) 11.25
6 Container Corporation of India 5.08
7 Bharat Electronics 4.36
8 Engineers India 2.28
9 Power Finance Corporation 5.62
10 Rural Electrification Corporation 5.25

The Index values  calculated on free float market capitalization methodology. The index has base date of 01-Jan-2009 and base value of 1000. Weights of index constituent are re-aligned (being capped at 25%) every quarter effective 2nd Monday of February, May, August and November.

The Govt. will have to sell between 0.6 and 1.5 per cent each in the 10 underlying stocks that form the CPSE ETF, similar to what it did in the first tranche.  In order to ensure smooth sailing for the second tranche, the government has sought out participation from pension funds and insurance companies.
The government is also counting on retail (small) investors, who will be given a discount of five per cent to the market rate.
CPSE ETF has yielded returns of 25 per cent in the past year, mainly on the on the back of  rally in energy stocks. 

Assessment

  • The CPSE ETF presents an opportunity to investors to take exposure to some of the best performing PSU companies across
    different sectors with relatively less stock specific risk as the risk gets diversified among the basket of stocks from different sectors.
  • The fund has a  portfolio of 10 stocks and the sectors ‘Energy’  & ‘ Oil and Gas’ dominates the fund which is a double edged sword. The funds performance in last year has been fulled to a large extent by oil prices.  
  • CPSE ETF’s performance has improved largely on account of performance of Indian Oil Corporation, which in past one year has appreciated by  56.7 % , Power Finance Corporation (up 36.16 %) and ONGC (32.5%).
  • In past 5 years, NIFTY CPSE Index gave absolute returns of 37% (till Dec 30, 2016). The PE ratio of NIFTY CPSE index stands at 11.4x vis-à-vis 21.9x of NIFTY 50 index. The poor discounting of the NIFTY CPSE index is on account of lower confidence of investors in Government controlled PSUs. 
  • The dividend yield of NIFTY CPSE index was 4.1% and that of NIFTY 50 index was 1.4% as on December 30, 2016. Thus from consideration pf dividends  alone, the CPSE fund is a good bet. 
  • The CPSE ETF charges an annual fee of 0.065 % of total assets. This is significantly lower than many other funds with PSU exposures as they have an expense ratio upwards of 2.25%. 
  • The government is also looking to launch one more CPSE ETF, with different underlying shares. This ETF is being managed by ICICI Prudential Mutual Fund and is expected to be launched next financial year.
  • Apart from external factors affecting the market, the funds performance depends on select PSUs most of which are are large and are characterized by inertia and slow pace of change and a not very inspiring work culture and management.
  • The fund shall be allotted and traded after 20 days of closing and even though it is at 5% discount there is a risk due to certain large events like union budget and developments in US and general stock market volatility.
  • Though the performance of the fund has been satisfactory, many PSUs including the likes of REC, PFC were offered at Prices which subsequently went down considerably and resulted in huge losses to investors who retained them. Thus investors in general have many bitter experiences of investing in PSUs and they are likely to be vary of investing in this fund.
  • The fund shall be allotted and traded after 20 days of closing and even though it is at 5% discount there is a risk due to certain large events like union budget and developments in US and general stock market volatility.
  • Even as operators are vary of about 20 day waiting period, there are deals reported in grey market and Kostak (application sale price) for 2 Lacs applications has been hovering in range of Rs. 2500-2900.
  • Investors with low exposure to PSUs  stocks can subscribe with a medium term perspective as a bit conservative and defensive bit. With market having come out of lows and run up in most underlying stocks of the fund and upcoming market uncertainties, a good degree of caution seems prudent. 
  • Despite the arbitrage lure, the price risk associated with few weeks holding cannot be recommended as Budget on Feb 1, 2017 could pose unknown risks

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