Even as the markets have rebounded in financial year 2021, government led stocks are still lagging behind in their performance. Returns from the National Stock Exchange’s (NSE) Central Public Sector Enterprises Exchange Traded Fund (CPSE ETF) have underperformed the benchmark Nifty by a wide margin in last four years. So far this year in FY21, Nifty CPSE Nifty rallied 45%, its best performance in five years but a no match to the robust rise of Nifty’s 72% in the same period.
The CPSE ETF is a passive investment fund that was created to help the government to divest some of its stake in selected CPSEs through the ETF route. The CPSE ETF is an open-ended, semi-diversified, thematic and passively managed ETF, which tracks and provide returns corresponding to the Nifty CPSE Index. The CPSE ETF fund consists of 12 public sector enterprises.
Bloomberg data showed, the Nifty CPSE index lost 42% in FY20, while the Nifty was down just 26%. In the previous year, FY19 Nifty CPSE index dragged 6% while the Nifty gained 15%.
According to Dhaval Kapadia, director, portfolio specialist, Morningstar Investment Adviser India Pvt. Ltd there are multiple reasons for the Nifty CPSE to underperform the benchmarks. “The CPSE ETF fund is a concentrated mix leaning towards power and oil stocks and under-performance in these handful of stocks drag the entire indices. Also, risks arising from government-related actions, which may not necessarily be always investor friendl, effect their performance," he said.
However, in the last few months the government-led stocks have started to gain traction as government has made announcements of strategic sale, divestment and privatisation. Starting from October, PSU stocks have seen a strong rally subsequently driving the Nifty CPSE ETF index higher. From October last year, Nifty CPSE gained 45% beating 31% rise of Nifty.
Arun Kumar, head of research, FundsIndia.com said, “As there were talks of divestment and privatisation, government led stocks started to attract investors from October."
The government-led stocks are way better in dividend yields, which makes CPSE ETFs attractive. As on 23 February, dividend yield of Nifty CPSE is 4.8% whereas it is 1.08% for Nifty. Dividend yield measures the quantum of cash dividends paid to shareholders as relative to the market value per share.
However, Kumar feels that there is an indication that government may not sell shares in listed stocks by bunching them together via the ETF route but stick to directly offloading either through divestment or privatisation.
In February, Prime minister Narendra Modi on Wednesday announced investment opportunities worth ₹2.5 trillion in the national asset monetisation pipeline mentioned in the Budget through sale of around 100 assets of central public sector enterprises (CPSEs). Modi said it is not necessary or possible for the government to remain owner of so many CPSEs and government should rather focus on public welfare and development. The four buckets of strategic sectors include atomic energy, space and defence; transport and telecommunications; power, petroleum, coal and other minerals; banking, insurance and financial services.
Kotak Institutional Equities said, in note on 1 March, that the government’s proposed privatization plan for PSUs may not fully achieve the objectives of the majority (government) or minority shareholders. It said that the list of strategic sectors is quite long andmany strategic PSUs face serious disruption challenges.
“The recent increase in market prices of PSUs reflects the market’s enthusiasm about large value unlocking from their potential privatization. The government can raise ₹12 trillion if it was to sell its entire holdings in all listed central PSUs at current valuations the amount could be higher given the likely strategic premium," it said.
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