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.

A Repurpose for our PSUs

Thought for the day

Background: 

The Central Public Sector Enterprises were set up with the purpose of promoting “national interest” and “public investments in large industries” – something which could not be done by the private sector. This was done way back in the 1960s and 70s.
Forty years on, a lot has changed in the economic and business environments. Private sector lead by Reliance, Tatas and Bharti Group has surged ahead and shown them quite capable of setting up and handling global scale industries. Even the holy grail of “Defense” production is now being handed over slowly to Indian private sector firms. So why should GoI own large swathes of sectors like Oil & Gas, steel, other metal producers, telecom, banks, FMCG, pharma, even Indian Railways? In fact govt. ownership has actually allowed a lot of firms to fall back and wither away in terms of competitiveness and financial health (Air India!!??).

The Repurpose: 

The GoI appears to be relooking at our national “family silver” in this new environment and gearing up to repurpose our CPSEs. We feel the main purposes now should be:

  1. Just retain a few PSUs of strategic and national importance in the long run.
  2. Wherever the CPSE is in good health, is listed, and serves no major national interest, monetize these assets quickly. This can be through dividends, divestment and/or strategic sales (like Maruti !!??).
  3. Improve the health of the others, and set them up for listing, divestment and/or strategic sales.
JainMatrix Investments, CPSE

Please … not the Taj Mahal

The Capital Restructuring: 

The Central Govt. has issued comprehensive guidelines on capital restructuring of CPSEs by way of buyback, dividends, issue of bonus and splitting of shares to rake in more revenue. The finance ministry issued fresh norms which are as follows:

  • CPSEs having surplus cash can no longer invest funds in FD’s in banks, which generate a poor post-tax return of 4-5%. Every CPSE having net worth greater than Rs 2,000 crores and cash & bank balance of over Rs 1,000 cr. would have to buy back their shares.
  • Related to dividend, the new guidelines mandate that every CPSE would have to pay a minimum annual dividend of 30% of PAT or 5% of the net worth (whichever is higher) subject to the maximum dividend permitted under the current regulations.
  • CPSE’s will have to issue bonus shares if their reserves and surplus is equal to or more than 10 times of its paid up capital. Further, all CPSEs have to consider issue of bonus shares if their reserves and surplus are more than 5 times of the paid up capital.
  • The order has replaced the general guidelines on splitting of shares, by mandating that every CPSE, whose market price or book value of its share exceeds 50 times of its face value, will have to split its shares to make it affordable for retail investors. (Source Financial Express)

A quick look at some of the CPSEs we track reveals that many of these firms meet the stated criteria. The chart indicates likely corporate action by these PSUs.

  • In green are the firms that pass the criteria for the corporate action.
  • We have also calculated the dividend payable threshold, in crores, for the firms per these guidelines. It is still subject to the maximum dividend permitted regulations.
JainMatrix Investments

The new norms applied to a few PSUs

Benefits:

  • Most of these new norms are very good and uniformly benefit all shareholders. Buy backs improve the Earnings per Share of the firm, and should soon raise their market prices. Dividends, splits and bonuses are shared by both GoI promoters and all other shareholders.
  • This is also superior to the Follow on Public Offer method of encashing the GoI’s PSU shareholding, which was damaging to the share price and generally manipulated by the market participants.
  • Funds raised from these divestments/ sales should be used for infrastructure, education and capital expenditures rather than mere funding of deficits. Of course one can only hope for this kind of discipline from the GoI.

Open questions:

The real challenge before the government is to decide if it wants the CPSEs to become:

  • Independent institution and public owned firms, like ITC and L&T, benefiting the broad investing public, or
  • Owned by strategic partners/ new owners, like Maruti Suzuki, where they take over the firm for a large ownership premium, benefiting the coffers of GoI.

Either way, I have a feeling the CPSEs, PSUs and who knows, maybe even PSBs, may once again become valuable for the public shareholders !!

JAINMATRIX KNOWLEDGE BASE 

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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 Investment Advisor. Punit Jain is a registered Research Analyst (SEBI Registration No. INH200002747) under SEBI (Research Analysts) Regulations, 2014. JM has been publishing equity research reports since Nov 2012. Any questions should be directed to the director of JainMatrix Investments atpunit.jain@jainmatrix.com.