Mumbai: The government will launch a further fund offer (FFO) in the Central Public Sector Enterprises (CPSE) ETF next week. The exchange traded fund is managed by Reliance Nippon AMC. Investors are being offered a 4% discount on the "reference market price" of the underlying ETF shares.
The reference market price is the average of the full day volume weighted average price of the constituents of the Nifty CPSE Index on the NSE over 20 and 22 March. The offer will open and close for anchor investors on 19 March 2019. It will open for non anchor investors (including retail investors) on 20 March 2019 and close on 22 March 2019.
The CPSE ETF was launched in 2014 and has seen three additional offerings (tranches) since then. The current offering is the fourth tranche.
Investors who bought the CPSE ETF at its initial launch were offered a 5% discount and bonus units if they held the ETF for more than one year. Investors in the subsequent three offers were also offered discounts of 5%, 3.5% and 4.5%, respectively.
The CPSE ETF has 11 public sector companies, but just 4 companies—Oil and Natural Gas Corp. of India Ltd (ONGC), NTPC Ltd, Coal India Ltd and India Oil Ltd—make up as much as 77% of the ETF.
These are not the same PSUs as the original composition of the CPSE ETF in 2014. A few PSUs such as GAIL (India) India, NTPC, Container Corporation of India (Concor) and Engineers India Ltd have been dropped while others like Neyveli Lignite Corp. Ltd (NLC), SJVN and NBCC India have been added to the ETF.
"The CPSE ETF is trading at very attractive valuations. As of 28 February, the dividend yield of the index was as high as 5.52% compared to 1.25% for the Nifty 50. The PE ratio was 8.43 compared to 26.32 on the Nifty. In addition, the government is also giving a 4% discount to investors," said Vishal Jain, head (ETFs) and fund manager at Reliance Nippon AMC.
Should you invest?
Experts are divided on this question. Shyam Sekhar, founder and ideator at financial consultancy iThought, came out in support of ETF on valuation and macroeconomic grounds.
“PSUs are extremely under-owned and have a lot of short-term negatives priced in. Overall economic growth has been muted in the last five years because there was no investment cycle revival. This is likely to change in the next 5 years regardless of who wins the election. CPSEs in the energy sector will benefit from this revival and an ETF is a good way to access them," said Sekhar.
Mumbai-based wealth manager Deepak Khemani recommended the CPSE ETF only as a short-term play due to the discount. “Ideally people should invest in ETFs for the long term. However in PSU-dominated ETFs like CPSE, investors usually enter only for the discount and exit soon after listing. I would not recommend this ETF as a long term investment. However someone who wants to capture the discount can do so," he said.
The CPSE ETF consists wholly of government-owned companies and this comes with certain risks. Government companies are often managed from a welfare or political point of view rather than the profit motive and this can eat into investor returns.
For example, in January 2018, ONGC, a relatively profitable PSU oil company was forced to buy Hindsutan Petroleum Corp. Ltd (HPCL) from the central government to help meet the government’s disinvestment target.
The CPSE ETF has also delivered poor returns in the past.
Its five-year returns stand at just 5.88% (as on 12 March 2019). Valuations of the ETF are indeed attractive compared to the broader market but this may just be a reflection of the poor performance of the ETF constituents and the lack of market confidence in them. The discount can offer short-term gains to investors who exit immediately after listing. However, short term market plays are not a tactic recommended by this pubication.