BackInterest in CPSE ETFs aids PSU stocks rally
Investors expect greater demand from state-backed firms will boost PSU shares
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Mumbai: Investors betting on continued demand for central public sector enterprise exchange traded funds (CPSE ETF) are driving up stocks of public sector undertakings (PSUs). Investors also believe that after Employees’ Provident Fund Organization (EPFO)’s participation in the CPSE ETF sale, more government-backed organizations will show interest.
On 11 January, the government announced the second tranche of CPSE ETF to raise up to Rs6,000 crore by selling stakes in the top 10 listed CPSEs. On the first day of its opening on Tuesday, the ETF was subscribed at least four times by anchor investors. The Nifty PSU Index has gained 7.21% since 4 January, while benchmark 50-share Nifty has added only 2.77%.
“PSU stocks have been rallying of late, largely on the back of CPSE ETF sale, and there are hopes that government will push other state-owned investors to invest in these instruments, which will keep the demand for these stocks upbeat," said Deven Choksey, group managing director of KR Choksey Investment Managers Pvt. Ltd.
According to Choksey, though much of the current rally could be attributed to the CPSE ETF sale, PSU stocks have been doing well for a while, as government is ensuring performance out of them.
EPFO said that it would invest at least Rs2,800 crore or over 62% of the original issue size of the further fund offer (FFO), a day before the CPSE-ETF’s follow-on sale began. This is the first time EPFO has participated in the government’s divestment plans.
State-run State Bank of India and Life Insurance Corp. of India, along with Nomura, Morgan Stanley, Axis Bank and Birla Mutual Fund were some of the anchor investors to the current tranche of CPSE ETF.
Sanjeev Bhasin, executive vice-president of markets and corporate affairs at IIFL Ltd pointed out that government had over owned PSU stocks, and there has been a disproportionate sale of certain scrips in the past, to meet divestment targets.
“However, over the last few months, a few stocks such as Bharat Electricals and NBCC which were not in the limelight earlier, have been performing very well," Bhasin said, adding with oil and power sector reforms, the last few years have been remarkable for PSUs. “The PSUs are least affected by demonetization, but their current outperformance may not continue. They will be market performers though," added Bhasin.
Some were sceptical about investing in state-run stocks and related instruments. The PSUs are seen as vulnerable to changes in regulations, given the fact that the government holds majority stake in these companies.
“My view is that no investor should ever buy a PSU stock, because of the inability of many of them, other than those in monopolistic situations, to fight the competitiveness of private sector peers," said Dhirendra Kumar, chief executive of Value Research, a mutual fund analytics firm.
Over the last 10 years, Nifty PSU index posted a compounded annual growth rate (CAGR) of -0.4%, compared with Nifty which logged a CAGR of 3.22%.
“A variety of accidental things makes the current CPSE ETF attractive, but largely it is something which should be looked at with caution. Government being the owner is a big risk to their outlook," Kumar said.
The underlying portfolio of the CPSE ETF has companies such as ONGC Ltd, Coal India Ltd, Indian Oil Corp. Ltd, Gail (India) Ltd, Power Finance Corp. Ltd, Rural Electrification Corp. Ltd, Container Corp. of India Ltd, Bharat Electronics Ltd, Oil India Ltd and Engineers India Ltd.
According to Kumar, around 75% of the CPSE ETF is constituted by state-run energy companies. “They are natural monopolies and are able to guard their profitability. To that extent it is its energy fund," said Kumar.
“It is advantageous to grab them at reasonable levels. The biggest problem though, is if you catch it at a market high, you could be dead," he added.
The CPSE ETF, managed by Reliance Nippon Life Asset Management Ltd, received subscriptions worth Rs6,000 crore from anchor investors against Rs1,500 crore reserved for such investors, according to a statement by Reliance Mutual fund.
The government had launched the first ever CPSE ETF in March 2014, consisting of scrips of 10 PSUs, which had raised Rs3,000 crore for the exchequer.
ETFs are 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.
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