The Central Public Sector Enterprises (CPSE) Exchange Traded Fund (ETF) is a vehicle for divestment for a part of the government’s stake in certain CPSEs. The CPSE ETF New Fund Offer (NFO) launched in March 2014 was oversubscribed 1.45 times. The Further Fund Offer (FFO) launched in January 2017 was oversubscribed 2.28 times and another one (FFO2), launched in March 2017, was oversubscribed 4.03 times. The combined AUM is Rs 11,500 crore, and there is another forthcoming FFO, with a disinvestment target between Rs 6,000 to Rs 12,000 crore.
In terms of weightage, the top five firms in the ETF are NTPC Ltd (19.59 per cent), Coal India (19.17 per cent), Indian Oil Corporation (18.98 per cent), Oil & Natural Gas Corporation (18.92 per cent) and Rural Electrification Corporation (6.19 per cent). The composition has been changed recently; with Gail India, Container Corporation of India and Engineers India dropped. and NTPC, NLC Ltd and SJVN Ltd. added. Six out of the 11 are sector leaders. For ease of tracking, there is a Nifty CPSE Index comprising 11 stocks with weightage, which are a function of free-float market capitalisation of the constituents. Over the last three years till October 31, 2018, the CPSE ETF has yielded a return of 5.97 per cent annualised, against Nifty total returns index (TRI) of 10.22 per cent. Since inception, its return has been 8.17 per cent annualised against 11.47 per cent.
The performance so far, by itself is positive and valuations are that much attractive now. As on October 31, the price-earnings (PE) ratio of Nifty, on the basis of FY18 earnings, is 25.4. The PE ratio of Nifty CPSE is only 9.5 — a 63 per cent discount. However, Return of Equity (RoE) is similar: 14.1 per cent of CPSE against 14 per cent.
The forthcoming offer opens and closes on November 27 for anchor investors. For non-anchor ones, it opens on November 28 and closes on 30. Performance of CPSEs so far has been muted, but that makes the valuations attractive. The dividend yield is superior, (5.25 per cent against 1.27 per cent) even after accounting for the relatively lower price level.
Given the strength of constituent firms, strong dividend history and lower valuations, coupled with 4.5 per cent discount, there is a case to look at CPSE FFO3. The recurring fund management charges are nominal against actively managed funds, even after considering SEBI’s revised TER norms. Given the low correlation between NIFTY and CPSE ETF returns, this could be a portfolio diversification strategy.
(The author is founder, wiseinvestor.in. Views expressed are personal)