Bharat22 ETF – A Balanced ETF – Post Listing Note

  • Date 29th Nov
  • Equity MF- ETF, Diversified
  • Allotment price: Rs. 35.97
  • CMP: Rs. 37.42
  • Advice: Buy with a 3 year perspective

Here is a post listing note on Bharat 22 ETF (BH22).

In this note, we continue from the 13th Nov Note – Bharat 22 ETF NFO Offer – A Balanced ETF 

jainmatrix investments, bharat 22 etf nfo

Subscription, Allotment Price and NFO details 

  • The BH22 is an open-ended index ETF which listed on 28th Nov, 2017. The investment objective is to provide returns like the S&P BSE Bharat 22 Index.
  • The NFO received the highest subscription for any new fund offer (NFO) in the history of Indian MF industry. The ETF was subscribed about 4 times as the amount to be raised was Rs. 8,000 cr. and it received applications for around Rs. 32,000 cr. The NFO attracted 3.35 lakh retail investor applications.
  • Due to the excellent response, the ETF issue size was raised to Rs. 14,500 cr. A NFO discount of 3% was offered to all investors including retail, retirement funds, QIBs and non-institutional investors.
  • Retail investors who applied with Rs. 2,00,000 (Retail cap) were allotted 5,560 units at Rs. 35.97/unit (including the 3% discount). Retail applicants appear to have received 100% allotment this time.
  • Currently the ETF is trading at Rs. 37.42 translating into a gain of 4.03%. This means any retail investor who applied for the max. allowable limit of Rs. 2,00,000 has notionally gained Rs. 8,060. This is because of the discount as well as rise in the S&P BSE Bharat 22 Index.
  • You can check the index value as well as the ETF value using the following link. Bharat 22 ETF Price – http://www.moneycontrol.com/india/stockpricequote/miscellaneous/iciciprudentialmutualfund/ICI15

Overall Opinion

  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. ETFs are also advantageous in terms of management costs & liquidity. Also with the discounts given in BH22, we feel that this is a good long term buy for low risk equity investor and is comparable to the Balanced MFs.
  • If you have missed out Bharat 22 ETF in the NFO, you can also BUY it from the open market.
  • Investors can BUY with a 3 year perspective.

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. Punit Jain discloses that he holds a position in BH22 ETF as a successful Retail applicant in NFO. He may also hold positions in some of the constituents of the ETF. Other than this JM has no known financial interests in BH22 ETF or constituent firms. 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. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

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Bharat 22 ETF New Fund Offer – A Balanced ETF

  • Date 13th Nov; ETF Opens 15-17th Nov
  • Product Type: Mutual Fund – ETF
  • Listing: Within 5 days post allotment
  • Raising Fund: Rs. 8,000 cr.
  • Sector: Diversified
  • Advice: Buy with a 3 year perspective 

jainmatrix investments, bharat 22 etf nfo

Summary

  • Overview: The BH22 is PSU heavy open-ended ETF scheme. The BH22 will cover 6 sectors and 22 firms including PSUs, PSBs and a few blue chip private firms. BH22 has a 20% cap on each sector and a 15% cap on each stock. The Rs 8,000 crore NFO is available at a discount of 3% on the Reference Bharat 22 Index. The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap. firms.
  • Risks: 1) There is no strategic clarity on GoI shareholding in these firms – will they be fully divested, or a strategic sale, or as JVs, or retained with GoI majority holding in the long run.  2) There is Political risk as a surprise election result could affect PSU firms.
  • Opinion: Investors can SUBSCRIBE to this ETF offering with a 3 year perspective.

See our past coverage of CPSE ETF NFO in Mar 2014, review in Sept 2015, the CPSE ETF FFO in Jan 2017 and a Video, and finally the CPSE ETF FFO 2 in Mar 2017.

Here is a note on Bharat 22 ETF (BH22)

Introduction  

  • The BH22 is an open-ended index ETF which is going to be listed on the Exchanges. The investment objective is to provide returns like the S&P BSE Bharat 22 Index. The amount to be raised is Rs. 8,000 cr.
  • The BH22 consists of 22 blue chip Govt. of India (GoI) holdings including PSUs, Public Sector Banks and the strategic holdings of GoI through SUUTI (Specified Undertaking of Unit Trust of India). BH22 is the 2nd ETF from GoI after CPSE ETF launched in 2014. Both these will speed up GoI’s disinvestment plans.
  • The BH22 will cover 6 sectors of basic materials, energy, finance, FMCG, industrials and utilities. The SUUTI firms (L&T, ITC and Axis Bank) have a 40% weight on the index. Other big names include SBI, Power Grid, NTPC and ONGC (5-9% each). The ones which would have a lower weight include NALCO, Indian Oil, Coal India, Bharat Electronics, Bank of Baroda, NBCC, Indian Bank and SJVN.
  • The mechanism of the ETF at launch would be as follows:

jainmatrix investments, bharat 22 etf nfo

Fig 1 – Bharat 22 ETF Mechanism

  • NFO price: The NFO Units being offered will have a FV of Rs. 10/- each and a premium of the difference between NFO Allotment Price and the FV. The NFO Allotment Price would be equal to 1/100th of S&P BSE Bharat 22 Index less discount.
  • In this offer 25% each is reserved for 1) Retail 2) Retirement Funds 3) QIB / NII and 4) anchor investors.
  • Discount: A discount of 3% on the NFO Reference Market Price of the underlying shares of S&P BSE Bharat 22 Index shall be offered to NFO of the Scheme by GOI.
  • The scheme is being managed by ICICI Prudential Asset Management Company Ltd. Asia Index will be the index provider and the index will be rebalanced annually.

Investment Details of BH22

  • The Scheme will invest at least 95% of assets in stocks of the Bharat 22 Index. It may invest in safe Money Market Instruments upto a max. of 5% of assets.
  • The AMC will use a passive or indexing approach to achieve the Scheme’s investment objective.
  • Here are Sectoral Asset Allocation, Historic Returns and Analysis of the 22 companies as part of this ETF.

jainmatrix investments, bharat 22 etf nfo

Fig 2 – Sectoral Allocation / Fig 3 – Performance of Index / Source: Offer Documents 

jainmatrix investments, bharat 22 etf nfo

Fig 4 – Analysis of Companies / Source: Offer Documents

  •  15 of the 22 firms are Large Cap giving some stability to this ETF composition.
  • Dividend: The Trustees may declare Dividend to Unit holders subject to the availability of surplus, at their discretion. If the Fund declares Dividend, the NAV will stand reduced by that amount.
  • Minimum Investment: It is Rs. 5,000 and in multiples of Re. 1 thereafter, with a maximum amount of Rs. 2 lakhs in retail category. Non Institutional Investors and HNIs may apply for over Rs 2 lakhs.
  • How to apply: You can apply via your broker or via the AMC (iciciprumf.com).
  • Listing:The units of the Scheme will be listed on NSE and BSE within 5 days after allotment. The allotment date of Units will be within 5 business days of offer application period. There may be an additional offering depending on NFO response.

How has the CPSE ETF performed so far?

From an issue price of Rs. 17.5/unit in March 2014 (for Retail), the CPSE trades at Rs. 30.4 giving a gain of 21% simple annual. The CPSE ETF FFO 2 launched in Jan 2017 had allotment at Rs. 25.21, giving a gain of 20.6% (in 10 months). So the energy focused ETF has so far generated above Index average returns.

Differences between CPSE ETF and BH22 ETF

  • The CPSE ETF comprised 10 PSU stocks from the Oil & Gas and energy sector. However the BH22 ETF is diversified among 6 sectors and 22 firms with a 20% cap on each sector and a 15% cap on each stock. Hence this ETF is more balanced across sectors and firms.
  • The GoI has cherry picked stocks which are into sectors where large reforms are underway.
  • This fund even includes Private sector firms like L&T, ITC and Axis Bank.
  • The CPSE ETF fund is larger. It has raised Rs 11,500 in 3 offerings from 2014 – 17.

Pros and Positives of BH22

  • This ETF has a lower management charge and the expense ratio is 0.0095% of daily average net assets. Also the maximum recurring expenses that can be charged shall not exceed 1.5% of daily net assets.
  • The fund will offer 3% discount to the NFO subscribers.
  • The 5 year share returns are 13.8% CAGR as against Sensex of 13.9%. See Fig 3. However the 1 year performance has been better at 22.5% as against 20.5% for Sensex.
  • Dividend yield for the stocks is 2.42% which is moderate, but higher compared to Nifty/Sensex, see Fig 4.
  • The constituents of BH22 have a lower P/E & P/B as compared to Nifty 50/S&P BSE Sensex. See Fig 5.

jainmatrix investments, bharat 22 etf nfo

Fig 5 – Valuations and Dividend Yields

  • The BH22 is diversified among 6 sectors with caps by sector and by stock. This gives leverage in the form of both secular & cyclical growth prospects.
  • Like the CPSE, the BH22 may be popular among Pension Funds, new equity investors and retirees.
  • Many of the firms have wonderful assets, the family silver of the GoI. Some even enjoy monopoly status in their sectors. With a resurgence in GoI governance and programs such as ‘Make in India’, Bank Recapitalization and focus on Defense and infrastructure, many firms have good prospects.
  • GoI is asking for higher dividends from PSUs and allowing them operational freedom to exploit assets and be more productive. This will benefits investors also. See report,  A Repurpose for our PSUs.

Cons and Negatives of BH22

  • There is no clarity on the future of GoI shareholding in these firms – will they be fully divested, or sold in a strategic sale, or expanded into JVs, or simply retained with GoI majority in the long run.
  • This BH22 ETF based divestment by GoI, like the CPSE, is likely to be repeated at a future date.
  • We are not sure if the high dividend paid by the PSUs will be passed on to the unit holders (either as NAV gain or Dividend) or used for recurring expenses, as per NFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 2.42% dividend yield in BH22 involves substantial monies.
  • The average beta of these stocks is 1.28 indicating higher volatility than indices.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution.
  • Any unexpected election results at the State or Center can delay reforms and affect BH22 performance.
  • A few firms are into financing power projects. The power sector is yet to see a revival and NPAs here are a key concern. As long as this problem is not resolved, these firms may face financial troubles.
  • Within the energy basket, there are upstream and downstream oil firms. Upstream firms do well when crude prices rise as their realizations go up, whereas downstream firms do well when crude falls as margins expand. The energy basket might be balanced, but together these firms may do just average.
  • Coal India recently hiked wages by 20%. Also there is a pollution aspect to coal usage. The share has performed badly. Any adverse government reforms could impact its financials in the short term.
  • ITC is a firm that is mainly into cigarette sales. This is a harmful product and in USA the industry players are in a sunset mode due to legal action – class action suits and massive penalties for compensating unwell consumers and their families.

Overall Opinion

  • The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap.
  • This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. Given the advantage of an ETF in terms of cost & liquidity along with the discounts given by the GoI, we feel that the BH22 ETF is a good long term buy for value conscious investors.
  • This product appears attractive to the low risk equity investor and is comparable to the Balanced MFs.
  • Risks – lack of strategic clarity on PSU firms, and Political – a surprise election result could affect PSUs.
  • Investors can BUY with a 3 year perspective.

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. Punit Jain may hold a position in several of the stocks mentioned in this report. He also holds an interest in CPSE ETF since NFO in 2014. Other than this JM has no known financial interests in BH22 ETF. 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. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

CPSE ETF FFO – An Energizing Offer – Post Listing Note

Date: 3rd Feb 2017 

Hi investors,

Introduction: We had published a report on the FFO (Further Fund Offer) of CPSE ETF on 14th Jan, 2017. And recommended a BUY with a 1 year perspective. You can have a look at the report on the following LINK and the video on this LINK.

Here is an update about the offer and about the performance of the CPSE ETF FFO.

  • Subscription response: The Reliance Mutual Fund managed CPSE ETF opened for applications from 17-20th It was subscribed by 2.30 times, with bids worth Rs13,802 cr. coming in against the issue size of Rs 6,000 cr. The FFO received 250,000 applications, with good demand across investor segments.
  • Allotment: Retail investors were favoured in this offer. It seems that full allotment has been made to all retail applicant applying up to Rs. 2 lakh worth of this Fund. Investors may also get a rounding off amount credited as refund.
  • Discount: A discount of 5 % on the FFO Reference Market Price of Index was offered to retail.
  • FFO Price: The FFO Allotment Price is approximately equal to 1/100thof Nifty CPSE Index minus discount. The allotment price was Rs 25.21 and this tranche was listed on 31st  Jan.
  • Performance: The EOD closing price on the exchange was Rs. 27.88 today, ie. 3rd Feb, 2017. This translates into a gain of 10.6% in 14 days.
  • Advice: (We stay with our recommendations) that this is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.
  • News: Based on the success of this second tranche of CPSE ETF, the Union Budget for FY 2017-18 announced that the government will continue to divest stake in state-owned companies in FY18 in the form of variations of CPSE ETF.

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. Punit Jain has an ownership in CPSE ETF 2014 units and CPSE ETF 2017 as a Retail applicant in NFO/ FFO only. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. 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. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

CPSE ETF FFO – An Energizing Offer – A Video

Hi Investors,

We present here a short video on the CPSE ETF FFO offer.

To read a detailed report, see CPSE ETF FFO – An Energizing Offer 

Happy investing,

Punit Jain

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Balmer Lawrie – An Update
  2. Why Stocks, and Investment Outlook – Dec 2016
  3. Investment Outlook – Short Term Pain, Medium Term Gain
  4. The Natural Quotient: A Sustainability Metric for Business
  5. PNB Housing Finance IPO: A Transformed Lender
  6. Endurance Technologies IPO 
  7. ICICI Prudential Insurance IPO – An Expensive BUY
  8. GNA Axels IPO
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. A Repurpose for our PSUs
  15. How to Approach the Stock Market – A Lesson from Warren Buffet
  16. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service offering page to find how you can get more.
  • Register Now to get our Free reports and much more, on the top right of this page, or by filling this Signup Form CLICK.

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. Punit Jain discloses an ownership in CPSE ETF 2014 units as a Retail application in NFO only. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. 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. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

CPSE ETF FFO – An Energizing Offer

  • Date: 14th Jan 2017
  • FFO Application: 18-20th Jan and Listing by 10th Feb, 2017
  • Amount to be raised: maximum of Rs. 6,000 cr.
  • Managed by Reliance Nippon Life Asset Management
  • Central PSEs, Exchange Traded Fund, Further Fund Offer
  • Buy with a 1 year perspective.

Overview: The Scheme is a follow on issue after the 2014 offer which was quite successful. CPSE ETF facilitates GoI’s initiative to disinvest stake in CPSEs through the ETF route. Past performance of CPSE ETF 2014 has been good with 19.8% CAGR over 33 months. A discount of 5% on the “FFO Reference Market Price” of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme. There are high sectoral risks in Oil and Gas sector with a commodities play. Also typically the asset rich PSUs are slow moving firms with a poor, lethargic culture. However overall the offer is attractive and rated a BUY with a 1 year perspective.

Advice: This is a medium risk, medium return offering suitable for conservative investors. Buy with a 1 year perspective.

Here is a note on the CPSE ETF Offer 2017.

Offer Description

  • The Scheme is an open-ended index scheme, listed on the Exchanges in the form of an Exchange Traded Fund (ETF). The investment objective of the Scheme is to provide returns that closely correspond to the returns of the Nifty CPSE Index, by investing in the constituents of the Index in the same proportion as in the index.
  • The CPSE ETF 2017 is an instrument created to help the GoI in the disinvestment of PSUs. Post listing, there is a facility that further disinvestment can also be done through this vehicle.
  • Ten leading PSUs’ will be included in this ETF. Typically these are fairly well known high dividend, low capital gains but asset rich companies.
  • FFO Price: The FFO Units being offered will have a face value of Rs. 10/- each and will be issued at a premium equivalent to the difference between FFO Allotment Price and the face value of Rs. 10/- each. The FFO Allotment Price would be approximately equal to 1/100th of Nifty CPSE Index and would be calculated considering discount offered by GOI pursuant to FFO of the Scheme for buying underlying Nifty CPSE Index shares out of the FFO Proceeds.
  • Discount: A discount of 5 % on the FFO Reference Market Price of the underlying shares of Nifty CPSE Index shall be offered to FFO of the Scheme by GOI.
  • Retail gets at least 70% quota of entire Offer. Anchor investors + QIB + NII will get the remaining available 30% quota of offer.
  • The scheme is being managed by Reliance Nippon Life Asset Management Limited (RNLAM)

Investment Details of the Scheme

  • The Scheme will invest at least 95% of its total assets in the stocks of the Nifty CPSE Index.
  • The Scheme may invest in Money Market Instruments upto a max of 5% of its assets which could include T-Bills, commercial paper of public private sector corporate entities, etc.
  • Amount to be raised: Rs. 6,000 cr. includes Initial Amount of Rs. 4,500 cr. and Addl. Rs. 1,500 cr.
  • The AMC will use a passive or indexing approach to try and achieve Scheme’s investment objective. Unlike other Funds, the Scheme does not try to beat the markets they track and do not seek temporary defensive positions when markets decline or appear overvalued.
  • Sectoral asset Allocation and historic returns – Source: Reliance MF FFO document
JainMatrix Investments, CPSE ETF

Table 1 – Sector allocation/ Table 2 – CPSE ETF 2014 returns inc. Dividend

  • Portfolio Turnover: With Subscriptions and Redemptions on a daily basis and tracking error, Portfolio Turnover Ratio is expected to be 0.15 as on Dec 31, 2016.
  • Dividend: The income received by way of Dividend shall be used for recurring expenses and redemption requirements or shall be accumulated and invested as per the investment objective of the Scheme. The Trustees may declare Dividend to the Unit holders under the Scheme subject to the availability of surplus, and at the discretion of the Trustees. If the Fund declares Dividend, the NAV of the Scheme will stand reduced by that amount.
  • Listing: The units of the Scheme will be listed on NSE and BSE by maximum Feb 10, 2017.
  • RGESS Eligibility: Investments made by a Retail Investors in the RGESS Scheme will qualify for a 50% deduction of the amount invested from the taxable income of the financial year.
  • Analysis of the ten PSUs as part of this ETF
JainMatrix Investments, CPSE ETF

Table 3 – CPSE ETF FFO PSUs analysis

  • Note 1: The Engineers India Ltd recent report by JainMatrix Investments is available on LINK
  • Note 2: When we say price is high, it is relative to 5 year historical prices. We have not done valuation exercises on these firms.

The ETF structure is explained below.

JainMatrix Investments, CPSE ETF

Table 4 – Nature of ETFs;  Source: Reliance Mutual Fund FFO document

Past Performance

The CPSE ETF 2014 was listed in April 2014, and has been able to give original NFO investors an absolute 64.24% returns over 33 months. This includes a 1 year bonus for Retail, which is not available in CPSE ETF 2017. The returns for Retail are 19.77% CAGR, higher than those in Table 2 published in FFO. Also see reports made by JainMatrix:

JainMatrix Investments, CPSE ETF

Table 5 – Past Performance of CPSE ETF 2014

PROS

  • This ETF offering has a lower management charge as stock selection and portfolio changes are automatic. The expense ratio is just 0.065% annualized.
  • The fund will offer 5% discount to the FFO subscribers.
  • The 5 year share returns are 8.05% CAGR, see Table 4. This is fair but below Sensex of 10.59%.
  • The dividend yield for these stocks is 5.24% today which is good, Table 4.
  • The average beta of these stocks is 1.16 indicating higher volatility than indices.
  • Many of these firms own wonderful assets, the family silver of the GoI. Some of these firms also enjoy monopoly status in their sectors. See our opinions in Table 4.
  • GoI is asking for higher dividends from PSUs and also allowing operational freedom to exploit assets and be more productive. This is positive. See report, A Repurpose for our PSUs
  • The crude oil price fell last year from USD 100+ levels to sub 50 per barrel. The fall looks complete for now. While prices are volatile, crude in next 1 year should be in USD 40-60 range. If it does, the Oil & Gas (O&G) sector overall can perform well.
  • This fund is O&G heavy with 57% weightage. However it does have a mix of upstream, mid and downstream O&G firms, which together can derisk the portfolio against commodity volatility.
  •  Employees’ Provident Fund Organisation decides to invest Rs2,800 crore in CPSE ETF. This surely meas that the institutional quots will be over subscribed.

CONS

  • While the expense ratio of the ETF is low, the high dividend paid by the PSUs may not be passed on to the unit holders, but used for recurring expenses, as per FFO document. The CPSE ETF 2014 too has not paid dividend for 2.5 years. The 5.4% dividend yield this year involve substantial monies. It’s not clear if dividends have contributed to the NAV of the CPSE ETF 2014.
  • This fund is O&G heavy with 57% weightage. If one extends the description to Energy/Coal/ Power/ O&G and related financing, it increases to 90%. These sectors are essential to the economy, but are typically operationally constrained and not shareholder friendly. They are dependent upon global prices, and so even well managed firms can swing to losses with a fall in commodity prices. In O&G sector, the upstream Oil Exploration firms have been hit by falling crude oil prices.
  • Even though Gail India has a monopoly, it has been hit in pipeline construction by interstate politics, farmer /social pressures and weak infra execution environment.
  • These stocks performance depends on revenue growth, which has been inconsistent in recent years.
  • Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution (Railways for coal, pipelines for gas).
  • PFC and REC are executors of GoI programs in power sector. Their returns are sometimes guaranteed by GoI but when the entire sector gets stressed, they can suffer poor performance.
  • This CPSE ETF 2017 offering is managed by Reliance Mutual Fund.

Overall Opinion

  • The current govt. is focusing on good execution and better administration with a series of reforms. The environment is more result oriented with less political interference in PSUs.
  • The outlook for Oil & Gas sector is stable this year. Domestic demand is high.
  • Past performance of CPSE ETF 2014 has been good with 19.8% CAGR over 33 months.
  • Retail gets at least 70% of CPSE ETF offer, so it is skewed in their favour.
  • There are high sectoral risks with a commodities play. Also typically the asset rich legacy PSUs are slow moving firms with a poor, lethargic culture.
  • However overall the offer is attractive and rated a BUY with a 1 year perspective.
  • This is a medium risk, medium return offering suitable for conservative investors.

JAINMATRIX KNOWLEDGE BASE 

See other useful reports:

  1. Balmer Lawrie – An Update
  2. Why Stocks, and Investment Outlook – Dec 2016
  3. Investment Outlook – Short Term Pain, Medium Term Gain
  4. The Natural Quotient: A Sustainability Metric for Business
  5. PNB Housing Finance IPO: A Transformed Lender
  6. Endurance Technologies IPO 
  7. ICICI Prudential Insurance IPO – An Expensive BUY
  8. GNA Axels IPO
  9. RBL Bank IPO 
  10. New Banks: Big Changes in Small Change 
  11. Equitas IPO – Leader in SF Banks
  12. Do you want to be a value investor?
  13. Mahanagar Gas IPO 
  14. A Repurpose for our PSUs
  15. How to Approach the Stock Market – A Lesson from Warren Buffet
  16. Announcement – SEBI approval as a Research Analyst

DO YOU FIND THIS SITE USEFUL?

  • Visit the Investment Service offering page to find how you can get more.
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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. Punit Jain discloses an ownership in CPSE ETF 2014 units as a Retail application in NFO only. Other than this JM has no known financial interests in CPSE ETF / Reliance Mutual Fund or any related firm. 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. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com .

CPSE ETF – Unlocking Value, Slowly

The CPSE ETF NFO was launched in March 2014, and JainMatrix Investments had evaluated this offer and rated it a BUY. See this report – LINK. See post NFO note – LINK. We now review this ETF for its performance so far and evaluate it as an investment today.

Summary

  • The ten CPSE ETF firms are well known, high dividend, asset rich Indian PSUs’.
  • Investors have got a return of 27% (absolute) and 18.8% (annualized) in 17 months.
  • The prospects of the ETF firms look good. The govt. is executing on long pending structural reforms such as oil prices decontrol, subsidy reduction, power sector refocus, etc. On the whole, the CPSE ETF firms are expected to perform well.
  • The 20% fall in the last 45 days gives investors an opportunity to enter at better value.
  • BUY the CPSE ETF with a minimum 1 year perspective.

Introduction

  • Date 14th Sep-2015
  • Mutual Fund Nature – Large and Mid Cap PSUs ETF
  • Issue Price – Rs 17.45 post discount for retail category (FV – Rs 10, Premium – Rs 7.45)
  • NAV – Rs 20.8
  • Advice: Buy

CPSE ETF Description

  • The Central Public Sector Enterprises ETF Index was started to help the GoI disinvestment.
  • The Fund Manager, Goldman Sachs listed the CPSE ETF in a New Fund Offer on 4th April 2014.
  • The ten firms included in this ETF are well known, high dividend, asset rich Indian PSUs’.
CPSE ETF, JainMatrix Investments

Fig 1 – Sector weights, JainMatrix Investments

CPSE ETF, JainMatrix Investments

Fig 2 – CPSE Performance, JainMatrix Investments

  • We can see from the Price history of CPSE ETF, Fig 2, that within 2 months of launch, it hit its high of Rs 27.95. It was steady at 24+ levels till early Aug 2015, but has fallen almost 20% to 20.8 today.

Performance Review and ETF Outlook

Now here is a look at the ETF performance since the NFO listing.

CPSE ETF, JainMatrix Investments

Fig 3 – Investment Performance , JainMatrix Investments

CPSE ETF, JainMatrix Investments

Fig 4 – CPSE Shares and Outlook, JainMatrix Investments

  • Investors have got a return of 27% (absolute) and 18.8% (annualized) on the ETF. Fig 3.
  • Being an ETF, this fund invests in and tracks a weighted average of share prices of the stocks listed in Fig 4. In addition, we capture the share price gains and dividend over 6.5 years.
  • JainMatrix Investments had pegged an expectation of 24% from this ETF for the first year. This was achieved, but in the last 2 months, the ETF NAV fell due to the to the Coal India, ONGC and GAIL shares fall.

Pros of ETF

  • The GoI is making efforts to energize these firms to achieve production & revenue targets that will achieve national objectives. This will benefits investors also.
  • Many of these firms own wonderful assets, the family silver of the Govt of India. These firms may also enjoy monopoly status, and may be the implementation arms for govt. initiatives.
  • We can see that the GoI is in the process of dismantling the Administered Price Mechanism in Oil & Gas, and allowing Coal India, ONGC, etc to truly work freely without govt constraints and subsidy systems. If this is done, the massive assets and value of these firms can be unlocked.
  • The CPSE ETF has a low management charge at 0.49% as the stocks and weightage is fixed.
  • The weighted average share price appreciation over last 6.5 years is 11.8% for the firms. See Fig 4. This of course can vary widely from year to year. Dividend yield for these stocks is 3.67%.
  • Tax benefits: Individual resident investors would gain from nil tax on Long term capital gains, which kicks in at 12 months for this equity oriented fund.

Cons of CPSE ETF 

  • The ETF is dominated by the Oil & Gas, Power and Coal sector, where we have seen in the last one year a rapid fall in global commodity prices. This has affected the ETF performance.
  • This fund is Oil & Gas heavy with a 60% weight. If one extends the description to Energy Sector with Coal, Power, Oil & Gas and related financing, it increases to 92%. This is a high sector risk.
  • The GoI is in the process of disinvestment in PSUs, including some of the CPSE firms. This typically lowers share prices in the short term, till this process is complete. There is also talk of a second CPSE fund.
  • Decontrol of prices in petrol /diesel sector has affected Oil E&P while benefiting OMC firms.
  • Power sector reforms are crucial for financial improvement and debt reduction. This has started, but even so the power sector financial firms may see uneven performance.
  • Most of these stocks are asset heavy and resource rich firms. Their performance depends upon revenue growth, which has slowed down in recent years.
  • Another sharp fall in global oil prices can again depress the CPSE ETF performance.

Overall Opinion

  • There should be a stabilization and recovery in the ETF from here basis the following:
    1. There has been a massive fall in Oil prices globally. However now, it does not appear that there will be a further sharp fall. Thus ONGC share should not fall much further.
    2. Coal India and GAIL disinvestments should be complete in the next 3 months.
  • The prospects of the ETF firms post the above events look good. The government is cleaning up on long pending issues with structural reforms such as oil prices decontrol, subsidy reduction, etc.
  • Coal India performance (with Railways support) has improved of late. They are tasked with utilization of massive coal deposits and good supply which will reduce the need to import coal and waste forex.
  • On the whole, the CPSE ETF firms are expected to perform well.
  • BUY the CPSE ETF with a minimum 1 year perspective.

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. Punit Jain has a small retail investor holding in CPSE ETF since NFO. He also has small holdings in the firms CIL, IOCL and EIL mentioned in this report. 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. JM has been publishing equity research reports since Nov 2012. JM has applied for certification under SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com.

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Central Public Sector Enterprises ETF – Invest

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.

JainMatrix Investments

_____________________________________________________________________________

  • 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…

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