By Joydeep Sen
The Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) was launched as a route for divestment of part of the government’s stake in certain CPSEs. The ETF route was an innovation against the conventional method of sale of shares to investors, i.e., either the IPO route or the Offer for Sale (OFS) route. CPSE ETF New Fund Offer (NFO) was launched in March 2014.
Units were listed in April 2014 on NSE and BSE. Further Fund Offer (FFO) was launched in January 2017 and another one (FFO2) was launched in March 2017. Response to the NFO and FFOs have been good, i.e., higher than the issue size. The combined AUM is Rs 11,500 crore. CPSE ETF is executed by Reliance AMC.
There are 11 stocks across sectors. In terms of weightages, the top five companies are NTPC (19.59%), Coal India (19.17%), Indian Oil Corporation (18.98%), Oil & Natural Gas Corporation (18.92%) and Rural Electrification Corporation (6.19%). The 11 stocks are across sectors—oil, power, mining, petroleum products, finance, etc. The composition has been changed recently; Gail, Container Corporation of India and Engineers India have been dropped. The ones added are NTPC, NLC and SJVN Ltd.
Concept of CPSE Index
For ease of tracking the composition and performance of the ETF, there is a Nifty CPSE Index. The Index comprises 11 stocks with weightages. The weightages are a function of the free-float market capitalisation of the constituents.
Market sentiments about PSUs have been negative for some time. Performance of CPSEs in general and the CPSE Index in particular, has been poor. Over the last three years till October 31, 2018, CPSE ETF has yielded a return of 5.97% annualised against Nifty total returns index (TRI) of 10.22% annualised. Since inception, CPSE ETF return has been 8.17% annualised against Nifty TRI of 11.47% annualised.
The poor performance by itself is a positive. Valuations are that much more attractive now, and makes a case for investment with a long-term horizon. As on October 31, 2018, the price-earning (PE) ratio Nifty, on the basis of FY18 earnings, is 25.4. As against this, the PE ratio of Nifty CPSE is only 9.5. This represents a 63% discount against Nifty PE level. Similarly, the price to book value (PB) ratio of CPSE at 1.3 times is at a 62% discount to Nifty PB ratio of 3.5 times. However, the Return of Equity (RoE) is at a similar level; 14.1% of CPSE against 14% of Nifty in FY18.
After the earlier ones, i.e., FFO and FFO2 of 2017, the next one, i.e., FFO3 is scheduled for the last week of November. As discussed earlier, performance of CPSEs so far has been poor but that makes the valuations (PE and PB ratio) that much attractive and that ROE is at a similar level as the broad index. On top of that, dividend yield of CPSE is superior, even after accounting for the relatively lower price level of CPSEs. Dividend yield of Nifty CPSE index is 5.25% against broad Nifty dividend yield of only 1.27%, as on October 31, 2018. While investors can purchase the ETF anytime, there is a discount available during the FFO period.
The investment case for CPSE ETF is a case of debate between active fund management, i.e., open-ended actively managed mutual fund schemes and ETFs. In India, contrary to the global trend, there is outperformance of actively managed funds over the indices (Nifty, Sensex, etc.). For investors looking at the value proposition of CPSEs over the long term through passive management along with the cost saving, there is a case to look at CPSE FFO3. The recurring fund management charges of CPSE ETF are nominal against the actively managed funds, even after considering Sebi’s revised TER norms.