The CPSE (Central public sector enterprises) exchange traded fund opens for subscription on Wednesday the 19th of March and closes on Friday the 21st of March. Allotment to anchor investors would be done on Tuesday the 18th of March. The government will sell through the fund shares in 10 listed entities. These companies are BHEL, Coal India, CONCOR, Engineers India, GAIL, IOC, OIL India, ONGC, PFC and REC. They are all dividend paying companies and have a track record of paying high dividends.
The government has tried various methods of divestment be it FPO (follow on public offer), French auction, OFS (offer for sale) and also just asking LIC to subscribe. In the latest there was once again cross holding done where shares of IOC were sold to ONGC and OIL India. The success of each of these methods has been poor and it is found that wherever or whenever an issue is being finalised, the share price starts falling. The government is making yet another attempt to find a new way to sell shares and realise a better price.
In this offering a maximum of 3% of each company would be offered through subscription. An index has been created for these shares and the same would be traded on the NSE. The value of the index as at close of trading on Friday the 14th of March was 1874.35. Units under the NFO would be offered at 1/100th of the NAV. Retail investors would get a 5% discount to the discovered price which would be the average volume traded weighted average of the shares traded over three days when the fund is open. There is a loyalty bonus as well with 1 bonus unit being offered for every 15 units subscribed in the NFO and held for 1 year from the date of allotment. This bonus works out to 6.67%. The fund offering is Rs 3,000 crs.
The expenses allowed to the AMC are no more than 0.49% and the fund is allowed to invest only in the index. These expenses would reduce if the AUM increase but they will not increase whatsoever. The fund is being managed by Goldman Sachs. The average dividend yield of the government companies forming part of the index is around 3.77%. The PE is virtually half that of the NIFTY and it is understandable when one considers the fact that the weightage is of the energy sector where cross subsidy exists
The maximum weightage in the index is to the oil and gas sector which accounts for 59% of the basket. Stocks like ONGC, OIL, IOC and GAIL are from this sector. Each of these companies are subject to subsidy sharing to foot the under recoveries of the oil marketing companies on account of subsidised kerosene, LPG and diesel. Over the last few quarters the price differential between open market price and selling price has been narrowing and the demand for diesel cars which are the culprits is reducing. With a change in government likely post these elections there is a strong possibility that the subsidy sharing system would be reviewed and these companies’ valuations are likely to rise as a result of the same.The current weightage of the top three holdings is ONGC 26.72%, GAIL 18.48% and Coal India 17.75%.
Investors particularly retail have been at the receiving end in IPO investment and have lost money in most issues. The current offering gives a basket of liquid stocks which have a good dividend yield and are all classified as “Navratnas” or jewels of the government. To add to the kitty there is a upfront retail discount of 5% as is the norm to retail investors in government offerings and a new innovation this time is the loyalty bonus of 1/15 th unit which corresponds to 6.67% of units subscribed in the NFO if held for one year.
In conclusion it appears to be a decent offering and looking at the current market mood and expectations of a change in the government offers scope for appreciation in the short and medium term. In the long term the returns could be even better as the dividend yield would also kick in as for the year ending March 2014, the government has extracted hefty dividends in the form of interim or special onetime already and the final dividends may not be significant.
SEBI Disclaimer: – I intend to subscribe to the above issue.
