Fall in energy stocks hits CPSE ETF

Investors in the government-backed CPSE Exchange Traded Fund (ETF) are deep in the red, after an 11 per cent fall in the last three trading sessions, following the government’s decision to make the companies absorb the rise in fuel prices.

The ETF has a skewed weightage towards energy and oil marketing companies, and is down 17 per cent in the past one year. Oil and Natural Gas Corporation, Coal India, Indian Oil and GAIL (India) together constitute more than 75 per cent of the CPSE ETF. In the past year, CPSE ETF has shed 20 per cent, compared to 8.25 per cent gains made by the Sensex.

“The government recently asked Bharat Electronics to sacrifice margins and the OMCs to absorb the fuel price burden. Unless the government gives confidence to investors that they will not go back on reform in the real sense the CPSE ETF is unlikely to outperform in the near term,” said G Chokkalingam, founder and managing director, Equinomics Research & Advisory.

The government’s recent move asking OMCs to bear ~1 per litre on petrol and diesel may indicate its inclination to go back on oil and gas reforms which were instrumental in re-rating of OMCs in the past couple of years, say analysts.

“We cut our FY19/20E earnings for OMCs by 12-37 per cent and target prices by 39-52 per cent as ~1 burden on downstream companies gives an indication of partial controls in oil and gas sector in a rising crude environment,” said a recent note put out by Prabhudas Lilladher.

Last Thursday’s sell- off in the market was led by energy stocks such as Reliance Industries and ONGC. Shares of oil marketing companies also tumbled 10-20 per cent after the government announced a cut of ~2.50 a litre in petrol and diesel prices.

Global crude oil prices are up more than 50 per cent in the year to date. Brent has been hovering above $85 a barrel, the most since November 2014, on fears that the impending sanctions on Iran’s petroleum industry would lead to constricted supplies.

Bharat 22 ETF, another public sector ETF launched in November last year as part of the Centre’s 2017-18 disinvestment programme, is down 12 per cent since inception.

More than 50 per cent of the fund is made up of ITC, L&T, SBI and Axis Bank. The government, which has raised ~229 billion through two tranches of the ETF, reportedly plans to list Bharat-22 ETF on an overseas stock exchange to raise foreign capital.

ETFs are traded on stock exchanges, with stocks, bonds or commodities as the underlying product. An ETF's portfolio exactly mimics the securities in its underlying index, in the same weightage.