Strong fundamentals, good dividend yield make Coal India, ONGC, NTPC, 3 other stocks good bets in current market—Check TPs, dividend payout ratios

Fears of rising inflation and efforts of global central banks to tame it by a series rate tightening has made stocks across sectors taking a big hit. In the past one month, BSE Power has corrected nearly nine per cent, while Nifty Energy and Oil & gas took a hit of 6-7% during the same period as on June 24.  

Despite the recent wave of corrections, brokerage firm Sharekhan is bullish on Oil & Gas and Power sectors. Sustained high inflation and accelerated rate hikes heighten investors’ fears on a potential recession in the US, it said.  

Saying it expects the market to remain volatile in near term, Sharekhan is of the view that investors should avoid richly valued stocks with slower earnings growth prospects.  

In the current market scenario, investors should be cautious and go for fundamentally sound stocks with a good dividend payout.

"They should focus on fundamentally strong companies (stability of earnings, sustained high dividend pay-out and low or debt-free) with consistent high dividend yield," it said.  

It feels that the oil & gas and power sectors have high dividend payout ratios and the recent correction has made dividend yield more attractive for these sectors.  

Based on the same logic, the brokerage firm has picked ONGC, Oil India, GAIL, NTPC, Power Grid and Coal India as they play on both growth and high dividend yield.

Coal India:  It maintained a buy rating on Coal India with price target of Rs 225. The stock trades at an attractive valuation of 4.7x its FY24E EPS (close to trough valuation) and offers a high dividend yield of 12-13%

ONGC: Maintaining a 'buy', It sees a target price of Rs 200 for this oil & gas stock. ONGC’s CMP factors in oil price of only $50/bbl and ignores strong earnings tailwinds from high oil & gas price and dividend yield of 10-11%.

GAIL:  It pegged target price of GAIL India at Rs 175 per share. The stock trades at an attractive valuation of 5.4x FY24E EV/EBITDA and offers a dividend yield of 6%, it said while assigning buy rating on the counter.  

Oil India: For this oil stock, Sharekhan set a target price of Rs 290. It was of the view that the earnings environment has turned favourable for upstream PSUs, given expectation of further 40-48% hike in domestic gas prices and elevated crude oil on geopolitical tensions.

NTPC: The brokerage maintained a buy rating with a target price of Rs 175 for NTPC. 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%, said Sharekhan. "Potential monetisation of NTPC Green Energy Limited through induction of strategic investor and an IPO at a later stage could unlock value from the renewable energy (RE) business," it said.

Power Grid: At an attractive valuation of 1.6x FY24E P/BV and a healthy dividend yield of 6%, Power Grid has a robust project pipeline worth Rs. 27,300 crore (excluding Leh-Kaithal project) and has capitalised ~Rs. 20,695 crore in FY2022, which provides earnings visibility for 2-3 years.  

"We expect an 11% CAGR in PAT over FY2022-FY2024E along with RoE of ~19% in FY2024E," it said while giving a buy rating. It pegged the target price of the counter at Rs 265 per share.