Central Public Sector Enterprises ETF – Invest

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  • Report Date 21-Mar-2014
  • NFO Offer Period – 19-21st March 2014
  • Mutual Fund Nature – Large Cap PSUs ETF
  • Will launch at Rs 10 NAV
  • Advice: Buy

Here is a note on the Central Public Sector Enterprises – Exchange Traded Scheme – NFO.

Offer Description

  • Goldman Sachs is launching the CPSE ETF through a New Fund Offer (NFO)
  • CPSE Index will facilitate GoI’s (Govt of India) initiative to dis-invest some of its stake in CPSEs through the ETF route.
  • Ten leading PSUs’ will be included in this ETF at offer stage
  • Typically these are fairly well known high dividend, low capital gains but asset rich companies
  • Already in the first 3 days of Offer, the fund has collected Rs 2400 crore of the Rs 3000 cr targets.
  • Analysis of these ten PSUs as part of this ETF
CPSE analysis, JainMatrix Investments

CPSE analysis, JainMatrix Investments

Note here: 1) Coal India price is taken from the IPO price to today 2) EIL FPO report by JainMatrix Investments is available at LINK

Pros

  • The ETFs have a lower management charge as stock selection and portfolio changes are automatic. The expense ratio is 0.49% annualized
  • Retail investor ie. who invest upto Rs 2 lakh get special Loyalty Units of 6.67% for holding this ETF for 1 year
  • The fund will offer 5% discount to the NFO subscribers
  • Average dividend yield for these stocks is 3.57% calculated as of today.
  • See figure above, the average share price appreciation over last 5 years is 9.4% for the entire basket. This of course can vary widely from year to year.
  • These together appear to offer the Retail investor about 24% returns in the first year assuming average appreciation of the share prices.
  • Many of these firms own wonderful assets, the family silver of the GoI. These firms also enjoy monopoly status in their sectors. 

Cons

  • However it is sad to see how this family silver has been eroding in value over the years.
  • The constraints within which these PSUs work makes it difficult to grow enterprise value and profits.
  • In Oil and Gas sector, the largest risk to corporate performance is ad hoc Subsidy systems and highly taxed products.
  • The Dividend yield in above table is for the recent year. This may look better than previous years due to the GoI demands for dividends to meet budgeted finance targets.
  • Most of these stocks are asset heavy and resource rich firms. Their performance depends upon revenue growth, which has not been high and varied widely in recent years.
  • Many of these firms depend on govt policies and monopoly situations to grow.
  • This fund is Oil and Gas heavy with 59-60% weightage. If one extends the description to Energy/Coal/ Power/ Oil and Gas and related financing, it increases to 92%. These sectors are essential to the economy, but are typically constrained and not shareholder friendly sectors.
  • The general elections of 2014 may have a big bearing on the share prices of these firms. Typical market risks apply to such investments.
  • The government as an owner/promoter in modern times may be driven by political and financial constraints rather than the original ‘Nation building’ objectives.
  • If GoI proceeds on dismantling the Administered Price Mechanism in Oil & Gas, and allows Coal India, ONGC, etc to truly work freely without govt constraints and subsidy systems, they are incredibly valuable firms and this fund can skyrocket. However this has not happened in the last 10 years.

Overall Opinion

  • This is a low risk, high dividend value oriented ETF offering.
  • There is a fair commitment for Retail gains, pegged by JainMatrix Investments at 24% above for the first year. Market performance can affect this number in either direction.
  • After 1 year investor will need to review the performance of the fund for continued ownership and their delivery against objectives.
  • The low risk Retail investor may invest in this Fund for the first year.

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Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Either JM or its affiliates or its directors or its employees or its representatives or its clients or their relatives may have position(s), make market, act as principal or engage in transactions of securities of companies referred to in this report and they may have used the research material prior to publication. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

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One thought on “Central Public Sector Enterprises ETF – Invest

  1. JainMatrix says:

    Reblogged this on JainMatrix Investments and commented:

    CPSE ETF NFO Update 04th April
     The CPSE ETF offering was successful and oversubscribed as applications were for Rs 4,400 crore when the offer was limited to Rs 3,000 cr.
     The ETF units were allocated to subscribers at a price of Rs 17.45.
     NFO investors got allotment by a formula – investor who applied for more than 5000 units got a guaranteed allotment worth 5,000 units. The balance units were allotted to all applicants on a proportionate basis, as per reports.
     Retail investors who applied for Rs 2 lakhs worth got refunded about Rs 45,700 and got about 8,800 units.
     Trading of this ETF started on the exchange today and it appreciated by 10.9%.
     So this Retail investor has gained Rs 16,700 from this NFO purchase already. This is a great start for investors !!
     As mentioned in my initial report, investors need to hold on to this ETF for 1 year to gain the Loyalty units. In addition, holding for over one year allows for dividend benefits as well as taxation gains.
    Good luck and happy investing.

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