IPO

CPSE ETF Further Fund Offer (FFO)

Government of India (“GOI”), as part of its ambitious disinvestment programme has approved the setting up of Central Public Sector Enterprise Exchange Traded Fund (“ETF”) comprising equity shares of Central Public Sector Enterprises (“CPSE”). The Nifty CPSE Index is constructed in order to facilitate the Government of India’s (GOI) initiative to disinvest some of its stake in selected Central Public Sector Enterprises (CPSEs) through the ETF route.

The index consists of 10 CPSEs with base date of 01- Jan- 2009.The New Fund Offer of the scheme was launched earlier in March,2014, under Goldman Sachs AMC wherein the units of which were listed (and continue to be listed) on the stock exchanges on April 4, 2014 in form of an ETF tracking the Nifty CPSE Index.


Source: NSE

Constituents of CPSE ETF

Container Corporation Of India Ltd Coal India Ltd
Engineers India Ltd Indian Oil Corporation Ltd
Gail (India) Ltd Oil & Natural Gas Corporation Ltd
Oil India Ltd Rural Electrification Corporation Ltd
Bharat Electronics Ltd Power Finance Corporation Ltd

Background of the NFO:

    • Government of India (GOI) used innovative route to divest its holding in CPSEs via ETF.
    • New Fund Offer (NFO) was first launched in March 2014 under Goldman Sachs AMC.
    • NFO received overwhelming response; NFO collection was Rs.4,363 Crs, out of which Rs.1,363 Crs was refund to investors due to limited issue size of Rs.3,000 Crs.
    • Participation was seen across various categories of investors.
    • Units of CPSE ETF were listed on 04th April 2014 on NSE & BSE.
    • Since inception, the CPSE ETF has grown at a compounded annual growth rate (CAGR) of 14.42% and accumulated a value of Rs 14,507 crore. As on Dec 30, 2016 the one year CAGR^ return of Nifty CPSE TRI* is 17.45% against 4.39% given by Nifty 50 TRI*.


^CAGR – Compounded Annual Growth Rate
*TRI – Total Returns Index

Why should you invest in the CPSE ETF FFO?

  1. Attractive valuation and superior dividend yield: Plays on India’s growth story through investment in CPSE stocks at attractive valuation and superior dividend yield – as compared to other broader indices as detailed below:
Index Name P/E Ratio P/B Ratio Dividend Yield
Nifty CPSE 11.44 2.00 4.07
Nifty 50 21.93 3.10 1.35
Nifty Next 50 25.14 3.29 1.69
Nifty 100 22.40 3.13 1.40
Nifty 500 25.30 2.82 1.32

Source: NSE. Data as of 30th Dec 2016

  1. Portfolio diversification through investment in blue-chip Maharatna and Navaratna CPSE stocks which are sector leaders, through a single instrument.
  2. Upfront discount: The upfront discount of 5% improves the overall total return for the investor.
  3. Lower costs: Zero transaction costs and lower expense ratios (6.5 basis points) for investors. ETFs are one of the fastest growing asset class in the world. As compared to other mutual fund schemes, ETFs carry lower expense ratios due to lower portfolio management, trading and operational expenses.
  4. Liquidity: Flexibility of trading on real time basis.

All the companies are profit making entities along with a good dividend track record (paid a combined dividend of INR 34,000 crores in FY16). A dividend yield of 4.02% at current price amounts to 6% pre-tax return, making it attractive in this low interest rate environment.

With such large amount of capital employed, the government is focusing on improving productivity through reforms like fuel deregulation, appointment of PSU bank CMD from the industry, power sector reforms etc. Each of the companies in the basket dominates their respective industry and is strategic to India’s growth. Additionally, earnings growth of CPSE had improved especially in Oil & Gas sector and the earnings growth differential between Nifty and CPSE basket has narrowed over the period.

How to apply in CPSE ETF:

You can apply online with Arihant given that you have an existing trading account with us. All you need to do is maintain credit balance of the respective amount and inform your Arihant relationship manager. Please note demat account is compulsory for applying in the issue as these are exchange traded units. Contact your nearest Arihant executive by clicking here.

A study showing 5 year returns of Rs 100 held in CPSE Index companies:

CPSE INDEX Weightage
%
5 Year
Returns
Rs 100
invested
Present
Value
ONGC 24.35 2% 24.40 24.90
Coal India 20.54 -2% 20.50 20.20
IOC 17.96 22% 18.00 21.90
GAIL India 11.17 4% 11.20 11.60
PFC 5.58 8% 5.60 6.00
REC 5.21 0% 5.20 5.20
Container Corporation 5.01 14% 5.00 5.70
BEL 4.33 25% 4.30 5.40
Oil India 3.39 -2% 3.40 3.30
Engineers India 2.26 4% 2.30 2.30
  Total 100 107
  CAGR% 7%

Data as on 31st Dec, 2016

Risk:

Three stocks-ONGC, Coal India and Indian Oil together constitute around 63% of the entire portfolio thus making it a bit skewed towards energy sector. This lends a higher risk element despite the fact that the stocks are some of the biggest names in their respective sectors. Experts are of the opinion that this is more of a speciality fund, rather than a typical diversified equity fund, and should be regarded as such.

Furthermore, performance based politics is bound to prevail in the Indian political diaspora and since these are government companies, they are expected to perform given Modi government’s ambitious agenda.

Conclusion:

Hence, we feel that investors with a slightly high risk-appetite can consider investing in the offer as the track record of the ETF has been good and it holds promise of good returns in future. Additionally listing gains are expected to occur as there is quite a roar about the issue in the market amongst retail investors given its previous track record.

Arihant Team
The Arihant Team believes everyone deserves access to sophisticated financial advice. From day one, our mission has been to help make investing easier and accessible to every Indian. Our team of experts are curating informative and research-based article on this blog, to help make investing and managing your money easier for you!

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