CPSE ETF is an open ended index scheme listed on the Exchange in the form of an Exchange Traded Fund (ETF), which tracks the Nifty CPSE Index.
About Nifty CPSE Index
The Nifty CPSE Index is constructed in order to facilitate the Government of India’s (GOI) initiative to disinvest some of its stake in selected Central Public Sector Enterprises (CPSEs) through the ETF route. The index consist of 10 CPSEs with base date of 01- Jan- 2009.
Further Fund Offer Opens: Wednesday, 15th March 2017
Further Fund Offer Closes: Friday, 17th March 2017
Benchmark Index Nifty
CPSE Index Pricing 1/100th of Nifty CPSE Index
Fund Manager – Payal Kaipunjal
Load Structure Entry & Exit Load : NIL
Discount of 3.5% on the “FFO Reference Market Price” of the underlying shares of Nifty CPSE Index shall be offered to FFO by GOI.
Recommendation: Do not Subscribe
Valuation and Investment Rationale
We believe that even though investors are lured with a discount of 3.5% to the existing price along with loyalty units as per the last offer for the CPSE ETF, there are many other companies which have better growth prospects than the ones in the ETF.
Launched in March 2014, the CPSE ETF is an integral part of the government’s divestment programme. The government had raised Rs.60 billion through the second tranche of CPSE ETF in January 2017 and Rs.30 billion from first tranche in March 2014.
CPSE ETF, operates through a structure that is similar to a mutual fund scheme, is constituted through a weighted-average price of 10 public sector units’ stocks. These are ONGC, Coal India, IOC, GAIL, Oil India, PFC, Bharat Electronics, REC, Engineers India and Container Corporation of India.
The CPSE Index trades at a PE multiple of 11.72 and dividend yield of 3.74% while the Nifty 50 index is available at 23 times and 1.25% respectively. The reason that the CPSE Index trades at a lower multiple in comparison to the Nifty 50 Index is due to the lower expected growth in the earnings of the portfolio companies.
The fund’s returns have been driven by commodity price trends in the past, as the index is replicating the earnings growth of the commodity businesses which forms a large part of its portfolio. The growth potential is directly linked to the price of crude oil in the international market as the policy driven factor of deregulation of petrol and diesel prices has already been discounted in the current price.
The price of crude oil in the international market has been volatile in the recent months due to various dynamics playing out in the global oil industry. Brent crude oil price had crossed USD 57 per barrel in the month of January 2017 on account of the decision of the OPEC to cut oil production by 1.2 million barrels per day since January 2017. Oil prices are however expected to remain under pressure as rise in shale oil production in the US continues to maintain the oversupply situation globally. Brent Crude oil price has corrected to levels of USD 50 per barrel in the month of March 2017. Any increase in the price of crude oil makes it more feasible for US oil producers to increase shale oil production.
The rise in the price of crude oil effectively increases the gross and net refining margins for oil refineries which are the oil marketing companies. ONGC which forms the largest part of the portfolio of the ETF (24.34%) is in the upstream segment of the Oil and Gas industry. The total revenue and profit growth of ONGC is directly related to the price of crude oil internationally. The decision to cut production by OPEC has resulted in a rally in the price of crude oil in the last few weeks of the last year 2016.
Crude oil prices bottomed out in the year 2016 and are expected to be volatile on account of the recent decision taken by the Organization of Petroleum Exporting Countries (OPEC) to cut oil production. The Global demand supply situation is still expected to be in favour of buyers as supply continues to remain in excess of demand. The growth for companies such as ONGC, IOC and GAIL is expected to be low on account of unfavourable dynamics for the global oil producers.