These 6 stocks from two sectors are a play on strong growth, high dividends

The recent market correction has made shares of a few consistent dividend-paying companies look attractive. In an environment where growth could soon be scarce and inflation is high, investments in fundamentally strong companies with a consistently high dividend yield could yield healthy returns.

“Oil & gas and power sectors have high dividend payout ratios, and the recent correction has made dividend yield more attractive for them,” said Sharekhan in a note.
The earnings growth outlook is expected to remain strong for oil & gas companies, especially ONGC and Oil India, supported by elevated prices, while earnings for power companies are relatively risk-averse as they earn regulated RoE on project equity despite current macro headwinds.


Overall, Sharekhan said it remains positive on six stocks ONGC, Oil India, GAIL, NTPC, Power Grid and Coal India. These stocks, it said, are a play on both growth and high dividend yields.

Here is what the brokerage said on the stocks:

Coal India | Target: Rs 225
Coal India has multiple levers for an improvement in profitability, including higher e-auction coal prices, supported by a rally in global coal prices amid recent geopolitical tensions. The single e-auction window for coal auctions would remove coal price disparity, the brokerage said, adding that it is a potential FSA coal (85 per cent of volume) price hike of 10-11 per cent. Sharekhan models a 4 per cent coal volume offtake CAGR over FY22-24E. A 25 per cent stake in Bharat Coking Coal (BCCL) stake sale and a potential listing could help unlock value. The stock trades at an attractive valuation of 4.7 times its FY24E EPS (close to trough valuation) and offers a high dividend yield of 12-13 per cent.

ONGC | Target: Rs 200
The earnings environment has turned favourable for upstream PSUs, given the expectation of a further 40-48 per cent hike in domestic gas price to $8.5-9 per mmBtu and elevated crude oil to over $100 a barrel on geopolitical tensions. Sharekhan expects an 18 per cent PAT CAGR over FY22-FY24E for ONGC. The company has earmarked an exploration capex of $4 billion to augment production and has guided for a 4 per cent CAGR in oil and 8 per cent CAGR in gas production over FY22-FY25E.
“The KG-DWN-98/2 block would be the key driver of volume growth with peak oil/gas production potential of 45 kbpd/12mmscmd in CY2024,” it said.

ONGC’s prevailing price factors in the oil price of only $50 a barrel and ignores strong earnings tailwinds from high oil & gas prices and a dividend yield of 10-11 per cent.

Oil India | Target: Rs 290
The earnings environment has turned favourable for upstream PSUs, given the expectation of a further 40-48 per cent hike in domestic gas price to $8.5-9 per mmBtu and elevated crude oil to over $100 per barrel on geopolitical tensions. We expect a robust 11 per cent PAT CAGR over FY22-FY24 for Oil India. OIL is also expected to benefit from a cyclical recovery in refining margin as it holds a 70 per cent stake in NRL, which has superior GRM given excise duty benefit. Additionally, NRL’s 3 times capacity expansion plan would create long-term value for OIL. The stock trades at 3.6 times its FY2023E EPS.

GAIL |Target: Rs 175
A sharp rally in crude oil and spot LNG prices to over $100 per barrel and $25-30 per mmBtu, respectively has improved the earnings outlook for GAIL’s gas marketing. The government’s focus to increase the share of gas in India’s energy mix to 15 per cent by 2030 versus only 6 per cent currently bodes well for sustained 7-8 per cent volume growth for the 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. The stock trades at an attractive valuation of 5.4 times FY24E EV/Ebitda and offers a dividend yield of 6 per cent.

NTPC | Target: Rs 170
The recent sharp 16 per cent 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 per cent. Also, NTPC’s market capitalisation ignores long-term value creation from large renewable energy (RE) expansion plans. NTPC’s standalone regulated equity base would clock a 12 per cent CAGR over FY22-24E. This coupled with sustained high plant load factor (PLF) for thermal assets and better coal availability to drive 16 per cent CAGR in standalone PAT over FY22-24E along with decent RoE of 14 per cent. Potential monetisation of NTPC Green Energy Limited through induction of strategic investors and an IPO at a later stage could unlock value from the RE business.

Power Grid | Target: Rs 265
Power Grid has a robust project pipeline worth Rs 27,300 crore (excluding the Leh-Kaithal project) and has capitalised Rs 20,695 crore in FY2022, which provides earnings visibility for 2-3 years. Sharekhan expects an 11 per cent CAGR in PAT over FY2022-FY2024E along with RoE of 19 per cent in FY2024E. The management is targeting Rs 8,000-9,000 crore capex in smart metering over the next few years and is eyeing opportunities from the planned installation of four crore meters with CPSE under MoU. This would help diversify the earnings stream for Power Grid. The company has a transmission asset monetisation target of Rs 7,500 crore for FY2023E which would help to further unlock value, provide capital for growth, and could result in higher dividends going forward. The stock trades at an attractive valuation of 1.6 times FY24E P/BV and offers a healthy dividend yield of 6 per cent.


(Disclaimer: Recommendations, suggestions, views, and opinions given by the experts are their own. These do not represent the views of Economic Times)