“Despite the recent performance, the valuations of the index are still attractive. Its price-to-earnings is 11, much lower than Nifty 50, and the dividend yield is four per cent, higher than the broader market benchmark. It is also a low-cost way to take exposure to public sector bellwethers,” says Sundeep Sikka, CEO, Reliance Mutual Fund.
But analysts say that investors should be cautious and understand the risks before investing in CPSE ETF. “The fund has a concentrated portfolio of 10 stocks and one sector dominates the fund,” says Kaustubh Belapurkar, director-fund research, Morningstar India.
According to data from National Stock Exchange, the energy sector has a weightage of as much as 57.3 per cent and metals, 20.7 per cent in December. The two sectors have a combined weightage of 78 per cent. There’s concentration even in companies. Oil & Natural Gas Corporation (ONGC) has a weight of 24.5 per cent and Coal India 20.7 per cent. “If investors are putting money in CPSE, they should have a view on the underlying stocks. Even if they think that certain sectors dominant in the fund will do well, they should not take more than 5-10 per cent exposure to the fund,” says Belapurkar.
CPSE ETF’s performance has improved thanks to Indian Oil Corporation, which is up 56.7 per cent in the past one year, Power Finance Corporation (up 36.16 per cent) and ONGC (32.5 per cent). It shows that a few stocks' performance or underperformance impacts the returns.
“The valuations of the underlying stock may look moderate, but one has to understand that historically, public sector companies have always had low PEs due to the government’s interference. Also, dividend yields are high as they have to share profits with the government. An investor should really be betting on the energy sector when investing in CPSE,” says Arun Kejriwal, director of Kris Research.
Sikka, however, feels that retail investors stand to benefit from investing in CPSE if they have a long horizon. He points out that analysts expect earnings growth of 7-8 per cent for the underlying companies. “While there’s concentration, these are Maharatna and Navratna companies that selected on strict financial criteria,” says Sikka.
The government’s second tranche of CPSE is expected to open by January 17 with the same 10 stocks that were part of the first one. These include ONGC, Coal India, Indian Oil Corporation, GAIL (India), Power Finance Corporation, Rural Electrification Corporation, Container Corporation of India, Bharat Electronics, Oil India and Engineers India. Retail investors are expected to get a five per cent discount during the public offering. It could be done by allocating additional units like it was done in the previous tranche.