The one question on every investor's mind today: Where do I invest in this volatile market? Brokerage and research firm Sharekhan by BNP Paribas says one should look at oil & gas and power sector.
In a research note dated June 21, 2022, Sharekhan said resilient earning outlook and high dividend payouts is the reason why it has chosen oil & gas and power sector companies. The firm is “positive” on the sectors.
Sharekhan said, “Indian equities have been volatile with the Nifty/Sensex falling sharply by 11% each in calendar year 22 year-to-date amid global growth concerns and a high inflationary environment. Thus, investors should focus on fundamentally strong companies with a consistent high dividend yield. We highlight here that the oil & gas and power sectors have high dividend payout ratios and the recent correction has made dividend yield more attractive for above sectors.”
The companies
Sharekhan said the six companies it has chosen in the two sectors are; ONGC, Oil India, GAIL, NTPC, Power Grid and Coal India as these stocks are a play on both growth and high dividend yield.
It said, “Our analysis indicates that high dividend yield companies (in oil & gas and power & energy sector) has outperformed benchmark Nifty handsomely by 24% with average stock price appreciation of 4.8% + a high dividend yield of 12.9% in CY22YTD as compared to -11.3% for the Nifty-50.”
We thus advise investors to buy ONGC, Oil India, GAIL, NTPC, Power Grid and Coal India as these stocks are a play on both growth and high dividend yield. Moreover, robust cash flow generation makes these companies strong candidate for share buyback especially ONGC and Oil India, Sharekhan said.
Coal India
Sharekhan has a price target of ₹225 per share on Coal India. It said, “Coal India’s board has given an in-principle approval to divest 25% stake in Bharat Coking Coal Limited (BCCL) and awaits approval from the government. A stake sale and a potential listing could help unlock value.”
ONGC
With a price target of ₹200 per share, Sharekhan said, “The earnings environment has turned favourable for upstream PSUs, given expectation of further 40-48% hike in domestic gas price to $8.5-9/mmBtu and elevated crude oil to >$100/bbl on geopolitical tensions. We expect a robust 18% profit after tax CAGR over FY22-FY24E for ONGC.”
Oil India
Sharekhan has a price target of ₹290 per share on Oil India. It said, “OIL is also expected to benefit from a cyclical recovery in refining margin as it holds 70% stake in NRL, which has superior GRM given excise duty benefit. Additionally, NRL’s 3x capacity expansion plan would create long-term value for OIL.”
GAIL
Sharekhan said, “The government’s focus to increase share of gas in India’s energy mix to 15% by 2030 versus only 6% currently bodes well for sustained 7-8% volume growth for gas transmission business. GAIL is evaluating various modes for monetisation of its gas pipeline assets, which would help in value unlocking and could also result in a higher dividend payout given likely improvement in cash flows.” It has a price target of ₹175 per share on GAIL.
NTPC
With a price target of ₹170, Sharekhan said, “The recent sharp 16% fall in NTPC’s stock price from its 52-week high is unwarranted given a risk-averse earnings model and a healthy dividend yield of 5%. Also, NTPC’s market capitalisation ignores long-term value creation from large renewable energy (RE) expansion plans. We maintain a Buy on NTPC with an unchanged PT of Rs. 170; FY24E P/BV attractive at 0.9x.”
Power Grid
With a price target of ₹265 per share, Sharekhan said, “The stock trades at an attractive valuation of 1.6x FY24E P/BV and offers healthy dividend yield of 6%.”
