CPSE ETF offers 11 stocks at reasonable valuations

The third follow-on offer (FFO3) of Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF), which opens for subscription from November 28, offers a good portfolio of 11 stocks at a reasonable valuation, feel analysts.

The subscription for the third FFO, part of the divestment programme announced by the Department of Investment and Public Asset Management (Dipam), will close on November 30. CPSE ETF is a passive investment fund that was created to help the government in its divestment programme of divesting stake in CPSEs through ETF.

The government, which is looking to raise Rs 8,000 crore through this offer with a greenshoe option to retain Rs 4,000-6,000 crore, will offer an upfront discount of 4.5% across categories.

Rahul Shah, VP – equity advisory group, Motilal Oswal Financial Securities, said this is a good opportunity for an investor, as one will get good PSUs at a reasonable valuation.

"Rather than buying individual stocks, they have made a good bouquet of investment made in a compressed ETF," he said.

In the last one year, Nifty CPSE Index has fallen 18.73%, with all stocks within the basket seeing a downward correction. Nifty CPSE Index is trading at a discount of 55-60% to the Nifty 50 Index valuation.

Shah said that price correction and comfortable valuations are important. "The entire picture offers a good valuation," he said.

There are some stocks which had not performed or laggard, but the combination is perfect, he said, adding that only investors with long-term appetite, such as those looking over one-year horizon should invest in CPSE ETF.

According to two analysts, who did not wish to be named, this is a right time to invest in CPSE ETF from a long-term perspective since the valuations are good.

One of the analysts said despite the current market conditions, the government is likely to achieve its fund raising target, since the stocks look good and attractive, and offer reasonable valuation. According to him, the retail portion is likely to be fully subscribed since they can be lured through discounts. Institutional investors are also likely to invest because they get a bouquet of stocks at good valuations, the analysts said, adding that the earlier CPSE ETFs also received good response.

The government raised Rs 3,000 through the initial offering of CPSE ETF in March 2014, and Rs 8,500 crore in two tranches in 2016-17. In the current fiscal, the government has a disinvestment target of Rs 80,000 crore but has so far raised about Rs 15,300 inclusive of the Rs 5,300 crore offer-for-sale (OFS) of Coal India.

"Hence, I think the government will be able to garner a part of its disinvestment target through these stocks," the analyst said.

However, another analyst is of the view that the entire basket of stocks isn't attractive even if it is available at a discount.

"It makes more sense to invest in selective few PSU stocks instead of investing in the entire basket. Staying away is better," this analyst said.

According to him, selective PSUs such as NBCC (India), Bharat Electronics (BEL), REC offer good valuations. The companies have a strong order book, and in the next 3-4 years, they are expected to have better operative performances.

"On the hand, I'm not too gung-ho about stocks such as Coal India, Oil India," he said. However, more weightage has been given to Coal India, NTPC, ONGC and Indian Oil Corporation in the fund offer, he added.

The number of stocks in the CPSE index has increased to 11 from 10 stocks with the entry of four new companies –NTPC, NLC India, SJVN and NBCC from the power and construction sectors. The three companies GAIL, Container Corporation and Engineers India exited the index as the disinvestment target of the government in these three companies were achieved.

After closing of the FFO, the units will be listed on the stock exchanges in the form of an ETF tracking the Nifty CPSE Index. The companies will be removed from the index if the government holding in these companies falls to 53% from 55%.

The dividend yield of Nifty CPSE Index is approx 5.25% as of October 31, 2018, further adding to the overall merit of investing in this ETF. In addition, CPSE ETF has a very low expense ratio of 0.95 bps. In the last three years, CPSE ETF has given an annualised return of 7.1%, lower than the Nifty return of 11.2%.