Introduction 

The BH22 is an open-ended index ETF which is going to be listed on the Exchanges. The investment objective is to provide returns like the S&P BSE Bharat 22 Index. The amount to be raised is Rs. 8,000 cr.

- The BH22 consists of 22 blue chip Govt. of India (GoI) holdings including PSUs, Public Sector Banks and the strategic holdings of GoI through SUUTI (Specified Undertaking of Unit Trust of India). BH22 is the 2nd ETF from GoI after CPSE ETF launched in 2014. Both these will speed up GoI’s disinvestment plans.

- The BH22 will cover 6 sectors of basic materials, energy, finance, FMCG, industrials and utilities. The SUUTI firms (L&T, ITC and Axis Bank) have a 40% weight on the index. Other big names include SBI, Power Grid, NTPC and ONGC (5-9% each). The ones which would have a lower weight include NALCO, Indian Oil, Coal India, Bharat Electronics, Bank of Baroda, NBCC, Indian Bank and SJVN.

- The mechanism of the ETF at launch would be as follows:           

 

Fig 1 – Bharat 22 ETF Mechanism

- NFO price: The NFO Units being offered will have a FV of Rs. 10/- each and a premium of the difference between NFO Allotment Price and the FV. The NFO Allotment Price would be equal to 1/100th of S&P BSE Bharat 22 Index less discount.

- In this offer 25% each is reserved for 1) Retail 2) Retirement Funds 3) QIB / NII and 4) anchor investors.

- Discount: A discount of 3% on the NFO Reference Market Price of the underlying shares of S&P BSE Bharat 22 Index shall be offered to NFO of the Scheme by GOI.

- The scheme is being managed by ICICI Prudential Asset Management Company Ltd. Asia Index will be the index provider and the index will be rebalanced annually.

Investment Details of BH22

- The Scheme will invest at least 95% of assets in stocks of the Bharat 22 Index. It may invest in safe Money Market Instruments upto a max. of 5% of assets.

- The AMC will use a passive or indexing approach to achieve the Scheme’s investment objective.

- Here are Sectoral Asset Allocation, Historic Returns and Analysis of the 22 companies as part of this ETF.

Fig 2-3 Sectoral Allocation/ Back Test performance of Index / Fig 4 – Analysis of Companies / Source: Offer Documents

- 15 of the 22 firms are Large Cap giving some stability to this ETF composition.

- Dividend: The Trustees may declare Dividend to Unit holders subject to the availability of surplus, at their discretion. If the Fund declares Dividend, the NAV will stand reduced by that amount.

- Minimum Investment: It is Rs. 5,000 and in multiples of Re. 1 thereafter, with a maximum amount of Rs. 2 lakhs in retail category. Non Institutional Investors and HNIs may apply for over Rs 2 lakhs.

- How to apply: You can apply via your broker or via the AMC (www.iciciprumf.com).

- Listing: The units of the Scheme will be listed on NSE and BSE within 5 days after allotment. The allotment date of Units will be within 5 business days of offer application period. There may be an additional offering depending on NFO response.

How has the CPSE ETF performed so far?

From an issue price of Rs. 17.5/unit in March 2014 (for Retail), the CPSE trades at Rs. 30.4 giving a gain of 21% simple annual. The CPSE ETF FFO 2 launched in Jan 2017 had allotment at Rs. 25.21, giving a gain of 20.6% (in 10 months). So the energy focused ETF has so far generated above Index average returns.

Differences between CPSE ETF and BH22 ETF

- The CPSE ETF comprised 10 PSU stocks from the Oil & Gas and energy sector. However the BH22 ETF is diversified among 6 sectors and 22 firms with a 20% cap on each sector and a 15% cap on each stock. Hence this ETF is more balanced across sectors and firms.

- The GoI has cherry picked stocks which are into sectors where large reforms are underway.

- This fund even includes Private sector firms like L&T, ITC and Axis Bank.

- The CPSE ETF fund is larger. It has raised Rs 11,500 in 3 offerings from 2014 – 17.

Pros and Positives of BH22

- This ETF has a lower management charge and the expense ratio is 0.0095% of daily average net assets. Also the maximum recurring expenses that can be charged shall not exceed 1.5% of daily net assets.

- The fund will offer 3% discount to the NFO subscribers.

- The 5 year share returns are 13.8% CAGR as against Sensex of 13.9%. See Fig 3. However the 1 year performance has been better at 22.5% as against 20.5% for Sensex.

- Dividend yield for the stocks is 2.42% which is moderate, but higher compared to Nifty/Sensex, see Fig 4.

- The constituents of BH22 have a lower P/E & P/B as compared to Nifty 50/S&P BSE Sensex. See Fig 5.

 

Fig 5 – Valuations and dividend yields

- The BH22 is diversified among 6 sectors with caps by sector and by stock. This gives leverage in the form of both secular & cyclical growth prospects.

- Like the CPSE, the BH22 may be popular among Pension Funds, new equity investors and retirees.

- Many of the firms have wonderful assets, the family silver of the GoI. Some even enjoy monopoly status in their sectors. With a resurgence in GoI governance and programs such as ‘Make in India’, Bank Recapitalization and focus on Defense and infrastructure, many firms have good prospects.

- GoI is asking for higher dividends from PSUs and allowing them operational freedom to exploit assets and be more productive. This will benefits investors also. See report, A Repurpose for our PSUs.

Cons and Negatives of BH22

- There is no clarity on the future of GoI shareholding in these firms  – will they be fully divested, or sold in a strategic sale, or expanded into JVs, or simply retained with GoI majority in the long run.

- This BH22 ETF based divestment by GoI, like the CPSE, is likely to be repeated at a future date.

- We are not sure if the high dividend paid by the PSUs will be passed on to the unit holders (either as NAV gain or Dividend) or used for recurring expenses, as per NFO document. The CPSE ETF 2014 too has not paid dividend for 3 years. The 2.42% dividend yield in BH22 involves substantial monies.

- The average beta of these stocks is 1.28 indicating higher volatility than indices.

- These stocks performance depends on revenue growth, which has been inconsistent in recent years.

- Many of these firms depend on GoI policies and monopoly situations to grow. Some are externally constrained by weak infrastructure that hampers distribution.

- Any unexpected election results at the State or Center can delay reforms and affect BH22 performance.

- A few firms are into financing power projects. The power sector is yet to see a revival and NPAs here are a key concern. As long as this problem is not resolved, these firms may face financial troubles.

- Within the energy basket, there are upstream and downstream oil firms. Upstream firms do well when crude prices rise as their realizations go up, whereas downstream firms do well when crude falls as margins expand. The energy basket might be balanced, but together these firms may do just average.

- Coal India recently hiked wages by 20%. Also there is a pollution aspect to coal usage. The share has performed badly. Any adverse government reforms could impact its financials in the short term.

- ITC is a firm that is mainly into cigarette sales. This is a harmful product and in USA the industry players are in a sunset mode with legal action and massive penalties for compensating unwell consumers.

Overall Opinion

- The BH22 appears better than CPSE on several counts like sector diversity, balance and higher mkt cap.

- This ETF is set to create good value for the investor as profit making PSUs, PSUs undergoing reforms and private sector firms have been bundled together. Given the advantage of an ETF in terms of cost & liquidity along with the discounts given by the GoI, we feel that the BH22 ETF is a good long term buy for value conscious investors.

- This product appears attractive to the low risk equity investor and is comparable to the Balanced MFs.

- Risks - lack of strategic clarity on PSU firms, and Political – a surprise election result could affect PSUs.

- Investors can BUY with a 3 year perspective.

Disclaimer

This document has been prepared by JainMatrix Investments Bangalore (JM), and is meant for use by the recipient only as information and is not for circulation. This document is not to be reported or copied or made available to others without prior permission of JM. It should not be considered or taken as an offer to sell or a solicitation to buy or sell any security. The information contained in this report has been obtained from sources that are considered to be reliable. However, JM has not independently verified the accuracy or completeness of the same.
Punit Jain may hold a position in several of the stocks mentioned in this report. He also holds an interest in CPSE ETF since NFO in 2014. Other than this JM has no known financial interests in BH22 ETF. Neither JM nor any of its affiliates, its directors or its employees accepts any responsibility of whatsoever nature for the information, statements and opinion given, made available or expressed herein or for any omission therein. Recipients of this report should be aware that past performance is not necessarily a guide to future performance and value of investments can go down as well. The suitability or otherwise of any investments will depend upon the recipient’s particular circumstances and, in case of doubt, advice should be sought from an independent expert/advisor. Punit Jain is a registered Research Analyst and compliant with SEBI (Research Analysts) Regulations, 2014. Any questions should be directed to the director of JainMatrix Investments at [email protected] .