Bharat 22 ETF, the Centre’s ETF route for disinvestment, has come up with its fourth tranche. It opened for subscription on October 3, 2019 for the anchor investors. Other institutional and retail investors can buy it on October 4.

Bharat 22 ETF is passively managed by ICICI Pru mutual fund which generates returns corresponding to the S&P BSE Bharat 22 Index. S&P BSE Bharat 22 is designed to measure the performance of 22 companies disinvested by the Centre. It comprises 19 PSUs and 3 private sector companies -L&T, ITC and State Bank of India- covering six sectors.


Should you invest?

The fund’s disappointing returns and the abysmal condition of most of its PSU constituents should be sound enough reasons to avoid this FFO. Since its launch in November 2017, it has given a negative return (CAGR) of 2.1 per cent. Over the last one year too, the NAV has fallen by 2.5 per cent, while the NIFTY 50 has gained 3.9 per cent.

While the ETF bets on the low valuation (portfolio PE of 11.8 times vs NIFTY PE of 24.6 times) and high dividend yielding stocks, these are nullified given the poor performance of the underlying portfolio.

The dividend yield of Bharat 22 ETF was 3.3 per cent as of July 2019. The dividend yield of eight of its constituent stocks has been comparatively higher, ranging from 5 to 12 per cent. The other ETF used for divestment by the Centre, CPSE ETF has a dividend yield of 5.1 per cent.

Discount not so attractive

Despite the mediocre performance in the past, the ETF attracted huge response and the previous tranches were oversubscribed 2.6 to 14 times. The final issue size was also higher at 1.8, 1.4 and 3.7 times of the base offer in the three tranches, respectively.

However, this traction amongst investors can only be attributed to the discount offered on the ETF, which is evident from the sharp drop in AUM in the month following the issues. For instance, during the initial NFO period on November 24, 2017, the ETF garnered AUM of Rs 11,852 crore. In the subsequent month, the fund’s AUM registered a fall by 28 per cent to Rs 8,539 crore.

Similarly, the AUM saw a drop of 43 and 15 per cent respectively, in the months following the subsequent tranches as well. The fund cumulatively collected Rs 35,900 crore in all the 3 tranches. However, the AUM as on Aug 31, 2019 was only at Rs 6,769 crore.

The significant drop in AUM appears to be due to heavy redemption from institutional and anchor investors. These investors predominantly look for short term gains and constitute about 75 per cent of the issue size whereas the retail investors form only about 25 per cent. Hence the drop in AUM is significant.

The earlier tranches offered discounts of 3, 2.5 and 5 per cent respectively. Similarly, the fourth tranche also offers a discount of 3 per cent on Government divested shares.

But looking at the past returns, the discount offered in the fourth tranche of Bharat 22 ETF might not lead to any form of arbitrage either.

How have the constituents fared?

The top three companies in the ETF are L&T (16.7 per cent), ITC (14.1 per cent) and SBI (9.2 per cent). Of the 22 companies, 15 gave negative returns in the last year. Indian bank, NBCC India and GAIL India were the worst performers. Bharat Petroleum Corporation which fetched the maximum return (34 per cent) saw most of its traction in the last week, post the announcement of Centre’s strategic divestment plans. In the private sector players, L&T and Axis bank delivered 17 and 14 per cent, respectively.