It’s safety first as funds buy low beta, high dividend yield stocks during selloff

Fund managers opted for safety and predictability in their stock pickings in March when the Sensex and Nifty dropped 23%. They bought shares of companies with relatively low beta, fairly good dividend yield, good market share in their business and strong backing of the government, which lowers the probability of default on payments. Their top stock picks were public sector undertakings (PSU companies) which offer reasonably good dividend yield, have high market share in their line of business and stability of earnings due to their favourable business models. In the private sector, they bought shares of companies with dominant market share. Here is the lowdown on five companies which managers of leading fund houses bought in March this year.

Coal India

CMP: Rs 145
Market cap: Rs 90,566 crore

Bought by: HDFC MF

A few fundamental factors make Coal India one of the most interesting ideas in the current extremely volatile phase of markets. Coal India has net cash balance of close to Rs 29,500 crore as of FY20. It has dividend yield of 9.34%. If one discounts the fact of low industrial production data largely due to the lockdown restrictions, the company’s business model remains intact. It is the largest coal producer in India with 11 direct and indirect subsidiaries. It caters to power plants, which form over 70% of offtake of its inventory. Besides this, the company caters to sectors such as steel, cement, and fertiliser, among others. Once construction activities start and execution of capital expenditure of India Inc gains pace, Coal India is likely to benefit meaningfully.

NTPC

CMP: Rs 88.6
Market cap: Rs 87,715 crore
Bought by: Franklin Templeton

Assured return on equity business model, high dividend yield of 6.98% and the acquisition of THDC India (formerly Tehri Hydro Development Corporation) and North Eastern Electric Power Corp (Neepco) are a few factors which form convincing arguments for eliciting fund managers’ interest in the NTPC stock. NTPC, which is mainly into thermal power, will add 2,500 megawatts of operating hydropower plants through the aforementioned acquisitions. In the broad market fall in recent months, the company’s valuation has become attractive. Analysts expected the company’s earnings per share to grow in the range of 17-19% for the present and the next fiscal.

Tata Consumer

CMP: Rs 305
Market cap: Rs 28,158 crore
Bought by: ICICI Prudential

There are a few key reasons for buying into the shares of Tata Consumer Products. One, the company’s share price fell close to 32% in the third week of March during the broad market fall. It provided a good entry point for fund managers. Second, the company, which is into key essential products such as tea, coffee, salt and lentils, was not expected to fall as severely as companies which do not manufacture essential products. This aspect of defensive theme with a sharp focus on essential products provides it an edge among its peers in the industry. Thirdly, the company’s financials have been fairly stable with reasonably good growth in revenues over the past few years. Lastly, the parentage of the Tata Group offers stability to its balance sheet in uncertain times.

ITC

CMP: Rs 182
Market cap: Rs 2.23 lakh crore
Bought by: SBI MF

A diversified business model, attractive valuations compared to its own historic averages and high dividend yield are attracting investors to this stock. Investors have been impressed with its strong operating cash flows, continuous capacity expansions across businesses and a healthy balance sheet. The company has declared its dividend policy last month, increasing its payout to 80-85% of earnings, which makes its dividend yield attractive, one of the highest a frontline company pays, giving huge margin of safety.

SBI

CMP: Rs 184
Market cap: Rs 1.64 lakh crore
Bought by: HDFC MF

A public sector banking giant, it has maintained its share of current and savings bank accounts in the market, despite the entry and aggressive marketing campaign of private sector banks, which is attracting long-term investors to the bank. It is the market leader in retail assets like mortgage and auto loans with its assets being of high quality, while its corporate NPAs are staying low. All its subsidiaries like SBI AMC, life insurance, general insurance and SBI Cards are leaders in their business and have added value to the bank.