CPSE ETF FFO 5 Review (19th July 2019)

Reliance Nippon Life Asset Management Ltd is coming up with 5th FFO of CPSE ETF. The fund invests in the NIFTY CPSE Index Stocks. This includes 11 PSU companies selected based on established track record, government holding, market capitalization, dividend history, sector representation, etc.

Note: FFO is short of Following Fund Offers, CPSE is for Central Public Sector Enterprises and ETF is Exchange Traded Funds.

CESE ETF Key Highlights

• CPSE ETF is an open ended index exchange traded scheme. It tracks the performance of Nifty CPSE Index.
• CPSE ETF is desiged to facilitate Government of India's initiative to disinvest some of its stake.
• CPSE ETF FFO 5 is the 6^th tranche of CPSE ETF since March 2014.
• CPSE ETF consists of 11 PSUs
• Previous CPSE ETF currently trades around Rs 26.40 giving a return of 8% plus since inception.
• CPSE ETF FFO5 Base size is Rs 8000 cr to 11500 cr crore.
• CPSE ETF FFO5 offers upfront discount of 3% to all categories.
• All previous issues met with overwhelming response.

Offer Documents

• CPSE ETF FFO 5 Scheme Information
• CPSE ETF FFO5 - One Pager Ad
• CPSE ETF FFO5 Key Information Memorandum (Propectus)

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CPSE ETF FFO5 review

Reliance Mutual fund, that started CPSE for PSU stock basket in the year 2014 (March 14)and met with astounding success and fancy from investors across the board. Now it is coming out with the sixth issue of CPSE as FFO5. Considering its fancy among investors, DIPAM (Government of India's disinvestment department) has hinted for at least 10 CPSE to be listed on bourses before this fiscal end. This is in a bid to achieve the target of disinvestment of Rs 105000 crore.

As we know, CPSE is a mix basket of PSUs of various sectors. Previous all CPSE offers have given lucrative returns to investors and hence all are eagerly waiting for this offer to open.

Earlier CPSE offers subscription data will help investors to take a call on investment:

Thus one can see that every time issue got overwhelming response and fund had to refund.

On returns aspect too CPSE gave better returns in medium to long term. Particularly last to CPSEs rewarded as under:

• CPSE FFO 3 gave return of 27.85% v/s 11% in Nifty
• CPSE FFO 4 gave return of 11.97%v/s 2% in Nifty

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ISSUE DETAILS

CPSE FFO5 offer is opening on 18^th July 2019 (only for a day) for Anchor investors and on 19.07.19 for other categories i.e. HNIs and Retail. Minimum investment is to be made for Rs 5000 and in multiples of Re.1 thereon, thereafter. Maximum investment by retail investor is Rs 2 lakh.

Since this is a mutual fund scheme, cheque is to be given along with the application on the opening day of the issue by respective categories of investors.

This time the base size is Rs 8000 cr. but fund may keep the total subscription up to Rs 12000 cr. post permission from the DIPAM.

All categories of investors are eligible for a 3% discount on the final price arrived at for the allotment. Anchor portion is 30% and non-anchor (i.e. other than Anchor) portion is 70% of the total issue size. CPSE is last quoted at Rs 26.11 per unit on NSE (as on 16.07.19)

This CPSE basket includes ONGC, Coal India, NTPC, Indian Oil, PFC, Bharat Electronics, Oil India, NBCC, NLC India and SJVN Ltd.

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VALUATION PARAMETERS:

Nifty CPSE Index on an aggregate is being offered at a '34% -to- 46% discount to Nifty 50 Valuations'

• FY21 PB(x): Nifty 50 2.4x vs CPSE 1.3x, ~46% lower
• FY21 PE(x): Nifty 50 15.8x vs CPSE 8.5x, ~46% lower
• FY21 EV/Ebitda (x): Nifty 50 9.3x vs CPSE 6.2x, ~34% lower
• Dividend Yield %: Nifty 50 1.24% vs CPSE 4.89%, 3.9x times
• RoE %: Nifty 50 12% - 15% vs CPSE 13% - 14% (RoE % of CPSE Basket almost same as Nifty 50, even though valuations at a steep-discount)

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* Returns from CPSE ETF inception date i.e. 28.03.2014

** Data ended 28.06.2019. (source: MFI)

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*All returns on the bask of 200000 Application

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NIFTY CPSE Index

NIFTY CPSE Index has been constructed to facilitate Government of India's initiative to disinvest some of its stake in Central Public Sector Enterprises (CPSEs) through ETF route. The index comprises of select 10 CPSEs. The index has a base date of Jan 01, 2009 and base value of 1000. One of the largest Indian equity ETFs tracks NIFTY CPSE Index.

As of June 28, 2019 composition of CPSE ETF is as under:

ABOUT CPSE FFO 5

CPSE ETF is an open-ended index exchange-traded scheme designed disinvest of government of India's stack in 11 PSU Companies. CPSE ETF is managed by Reliance Nippon Life Asset Management Ltd through Reliance Mutual Fund business unit. Company has so far brought 4 tranches of CPSE ETF with maiden fund offer (NFO) in March 2014 and thereafter 3 successive Following Fund Offers (FFOs) in January 2017, March 2017 and Nov 2018 is now coming out with CPSE ETF FFO5.

Offer of Units of Rs 10 each (i.e. face value) for cash (on allotment, the value of each Unit would be approximately 1/100th of the value of Nifty CPSE Index) to be issued at a premium, if any, approximately equal to the difference between face value and FFO 5 Allotment Price during the Further Fund Offer 5 (FFO 5) and at NAV based prices thereafter. For the existing CPSE ETF, the Ongoing Offer Period for the Scheme commenced on April 04, 2014. 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.

CPSE ETF Scheme

CPSE ETF is a passive investment fund that was created to help the government in its disinvestment program of divesting stake in select Central Public Sector Enterprises (CPSE) through Exchange Traded Funds (ETF). The fund invests in the Nifty CPSE Index stocks - that includes eleven PSU companies (Maharatnas, Navratnas, Miniratnas, Sector Leaders) selected on the basis of established track record, government holding, market capitalization, dividend history, sector representation, etc. - in the same proportion and weightage as of the index.

The investment objective of the Scheme is to provide returns that, before expenses, closely correspond to the total returns of the Securities as represented by the Nifty CPSE Index, by investing in the Securities which are constituents of the Nifty CPSE Index in the same proportion as in the Index. However, the performance of the Scheme may differ from that of underlying index due to tracking error. There can be no assurance or guarantee that the investment objective of the Scheme would be achieved.

CPSE ETF NFO, FFO & FFO 2 received overwhelming response as its collection was Rs 4,363 Crs, Rs 13,705 Crs and Rs 10,083 Crs respectively, out of which Rs 1,363 Crs, Rs 7,705 and Rs 7,583 Crs respectively was refunded to investors due to the limited issue size of Rs 3,000, Rs 6000 Crs and Rs 2,500 Crs respectively. This time for CPSE ETF FFO3 the base limit is Rs 8000 cr. and the Fund has permission to keep oversubscription up to 75% of the base size i.e. Rs 6000 cr. thus making the overall fund offer of Rs 14000 cr. All these ETFs are listed on BSE and NSE.

History of CPSE ETF Public Offer

New Fund Offer (NFO)

• NFO was first launched in March 2014
• NFO received overwhelming response; NFO collection was Rs 4,363 Crs, out of which Rs 1,363 Crs was refund to investors due to limited issue size of Rs 3,000 Crs
• Participation across various categories of investors
• Units of CPSE ETF were listed on 04th April 2014 on NSE & BSE

Further Fund Offer (FFO)

• FFO was launched in January 2017
• FFO received overwhelming response; FFO collection was Rs 13,705 crs, out of which Rs 7,705 crs was refund to investors due to limited issue size of Rs 6,000 Crs
• Participation across various categories of investors
• FFO Units of CPSE ETF were listed on 31st January 2017 on NSE & BSE

Further Fund Offer 2 (FFO 2)

• FFO 2 was launched in March 2017
• FFO 2 received overwhelming response; FFO 2 collection was Rs 10,083 crs, out of which Rs 7,583 crs was refund to investors due to the issue size limit of Rs 2,500 crs.
• Participation across various categories of investors
• Units of CPSE ETF were listed on 28th March 2017 on NSE & BSE

Further Fund Offer 3 (FFO 3)

• FFO 3 was launched in November 2018
• FFO 3 received overwhelming response; FFO 3 collection was Rs 31,203 crs, out of which Rs 14,203 crs was refund to investors due to the issue size limit of Rs 17,000 crs.
• Participation across various categories of investors
• Units of CPSE ETF were listed on 10th December 2018 on NSE & BSE

Further Fund Offer 4 (FFO 4)

• FFO 4 was launched in March 2019
• FFO 4 received overwhelming response; FFO 4 collection was Rs 30,464 crs, out of which Rs 20,464 crs was refund to investors due to the issue size limit of Rs 10,000 crs.
• Participation across various categories of investors
• Units of CPSE ETF were listed on 1st April 2019 on NSE & BSE

Further Fund Offer 5 (FFO 5) Investment Rationale

• Play on India growth story through investment in the large CPSE stocks at relatively better valuations compared to other broader indices.
• Portfolio diversification through investment in blue-chip Maharatna, Navaratna & Miniratna CPSE stocks majority of which are which are sector leaders / near monopolies.
• FFO 5 price advantage - Discount to all categories of investors.
• Valuation and Dividend Yields: Reasonable P/E ratio and dividend yields compared to broader market index.
• Relatively lower correlation ranging from 0.57 to 0.68 vis-à-vis Nifty 50 index (over 1 Year & 3 Years period ending 28th June, 2019), helping portfolio diversification.
• Flexibility of trading on real time basis.
• Low expense ratio i.e. 0.0095%.
• Investors will be able to diversify exposure across a number of Public Sector companies through a single investment.

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CONCLUSION

Based on CPSE ETF rewards to investors for all previous floats, investment in this CPSE FFO5 is recommended for medium to long term rewards.

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CPSE FTF FFO 5 Allotment Status

Check CPSE ETF FFO Allotment Status

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