NTPC: Charged to move higher

Maulik Madhu

NTPC, the country’s largest power producer, has been a consistent dividend payer. After the 4 per cent fall (year to date) in stock price, at ₹136, the dividend yield for the stock works out to 2 per cent for 2014-15.

This is but the lowest dividend yield in recent years. During the five years until 2013-14, the dividend yield of the stock ranged between 2.8 per cent and 4.2 per cent, peaking in 2013-14. Also, at 34-43 per cent, the dividend payout during this period was at a comfortable level. Dividend payments as a proportion of earnings, however, fell to 20 per cent in 2014-15, when net profit declined 12 per cent. This was following a change in tariff norms by the CERC, the central power sector regulator.

Once the company’s earnings pick up, dividend payments too should rise. For the quarter ended September 2015, NTPC posted 7 per cent and 24 per cent growth in revenue and operating profit respectively, over the same quarter the previous year, thanks to higher power sales and better tariffs. Net profit too grew 40 per cent, thanks to tax refunds.

The long-term growth prospects of the company too look sound. NTPC still enjoys tariffs that allow a complete pass-through of costs plus an assured pre-tax return on equity of 15.5 per cent. It is well-placed on the coal front too. It has a secure fuel supply with 90 per cent of its coal requirement being met from Coal India and the rest from imports. Apart from that, NTPC has captive mines too.

NTPC is also expanding its power generation capacity and this should improve earnings despite the changed tariff regulations. From 44,398 MW as of March 2015, it plans to increase its installed capacity to 46,801 MW by the end of the current fiscal. That apart, given that NTPC is among the lowest-cost power producers in the country, higher demand from State distribution utilities, as their financial condition improves, too should help.

BOB: Banking on its new Chief

Radhika Merwin

In the banking space, many public sector banks are available cheap, but they have found few takers, given their muted earnings and high stressed assets. Private banks, on the other hand, trade at a steep premium, thanks to their steady growth in earnings. But if you are a conservative investor, you might want to steer clear of expensive stocks that carry higher risk. Instead, betting on stocks that are good dividend payers offers stability during a downturn.

Bank of Baroda, for instance, has been a consistent dividend payer. In the last three years, its dividend payout has been about 22 per cent. In 2014-15, even as the bank’s earnings fell about 22 per cent year-on-year, dividend payout remained rock steady at 22 per cent. BOB also looks attractive from a dividend yield perspective. After rallying 65 per cent in 2014, the stock of BOB has fallen 25 per cent in 2015 so far, as hopes of a quick recovery faded. Such stocks with high dividend yield make for better value picks. Currently the dividend yield of BOB stands at about 2 per cent, higher than the average of all CNX 500 companies at 1.4 per cent.

On the core business front, however, the bank is likely to witness earnings pressure for another couple of quarters. In the latest September quarter, the bank’s slippages have been the highest in many quarters and the gross non-performing assets moved up to 5.56 per cent of loans, taking the total stressed assets (including restructured) to a little over 10 per cent. BOB’s loan growth has also been muted in the last few quarters.

Nevertheless, BOB still remains one of the better capitalised PSBs and boasts of a strong domestic presence. It will directly benefit from an improvement in economic growth over the long run. The new MD and CEO’s non-PSU experience could also help , with his focus on asset quality, move to rebalance the portfolio and use of technology.

BPCL: A refined dividend play

Anand Kalyanaraman

It has run up nearly 46 per cent over the past 15 months to ₹907. But the dividend yield on the stock of public sector oil marketing company BPCL still works out to a neat 2.5 per cent (based on the ₹22.5 per share dividend declared for 2014-15). The company has been a regular dividend payer, not missing a beat in 25 years at least. Guess, dividends are a constant when your largest shareholder — the government, in BPCL’s case — is always in need of funds. Over the past few years, BPCL has paid out a moderate 30-32 per cent of its earnings as dividend.

This not-too-high dividend payout ratio provides comfort on the company’s ability to continue paying dividend. BPCL is in a sweet spot, thanks to many factors that have helped the stock run up. Primarily, the pricing reforms in the oil sector have slashed under-recoveries of the PSU oil marketing companies (OMCs) — Indian Oil, BPCL and HPCL — from selling fuels below cost. Freeing up of diesel prices has also increased the possibility of the OMCs earning higher margins on marketing the fuel. Next, the subsidy sharing mechanism for 2015-16 has been announced and the OMCs are being fully compensated for under-recoveries.

So, their borrowings have come down, and consequently their interest cost. BPCL has also posted good refining margins — the difference between the cost of crude oil and the price of the refined products. The company has been able to control its inventory losses arising from the decline in crude oil prices, better than peers. All this helped BPCL grow profit at a robust 23 per cent in 2014-15, and nearly double it in the recent June and September quarters.

The continuing rout of crude oil has worked to the benefit of the OMCs. One, prices of refined products, too, have fallen but the refining margin, which eventually matters, has remained fairly healthy. Also, low cost of crude should mean lower under-recoveries and lower fuel losses on refining.

Weak global demand and oversupply should keep crude oil subdued.

Finally, BPCL has a significant presence in the exploration business, which should help in the long run.

ACC: A bet on the economy

Rajalakshmi Nirmal

ACC has a consistent dividend paying record. Over the last five years, the company has paid 50-55 per cent of its profits as dividend every year. The dividend paid stood at about ₹30-35/share.

With cement manufacturing capacity of 30 million tonnes, ACC is the second-largest cement producer in the country. Its total cement capacity will stand increased at 35 million tonnes by end-2016, thanks to additions in Jharkhand (by 1.35 MT), Kharagpur (by 2.7 million tonnes) and Chhattisgarh (by 1.1 million tonnes grinding unit).

For more than two years, the capacity constraint in the East saw the company lose market share.

Now, as the new capacities get commissioned in a year’s time, ACC may regain the lost share from peers and volume growth may return. All capex can be funded internally without disturbing dividends as the company has healthy cash and is debt free.

The company’s total borrowing of ₹567 crore outstanding in 2009 was entirely repaid by the end of 2014. The company generated profits (after tax) of ₹1,000 crore plus every year during this period.

Now, given that the company is working towards improving operational efficiency by replacing some legacy plants, which saw an increase in maintenance expenses and operating metrics, things are also set to improve for the company.

The scope for appreciation in the stock price is, however, limited. Until there is a strong revival in the economy and consumer spending on housing improves, cement despatches may not go up significantly. Market sentiment on cement stocks might also stay tepid until then.

With IIP showing an uptick, some improvement in cement demand is likely in the next six-nine months.

It was a lacklustre show by ACC in the September quarter. Volumes were flat at 5.6 million tonnes over the same quarter last year and revenue was marginally lower. Profits were down 11 per cent.

The recent ruling by COMPAT, setting aside the penalty slapped on cement companies on charges of cartelisation, provides temporary relief to the company.

Nalco: Down but not out

Meera Siva

Stocks of metal producers have been losing lustre in the past year due to a glut from falling demand, mainly from China and many private metal and mining companies are saddled with high debt. However, State-owned companies offer opportunities for a long-term investor. One good option is the stock of aluminium maker National Aluminium Company (Nalco).

The stock price has fallen over 30 per cent in the past year and currently offers a dividend yield of about 4.5 per cent (based on 2014-15 dividend per share of ₹1.75).

The company’s dividend payout was 34 per cent of profits in 2014-15. The price discounts the company’s trailing 12-month earnings by about nine times. This is cheaper than Hindalco (trading at over 20 times) and the company’s three-year range of 10-12 times.

Compared to the nearly 80 per cent drop in iron ore prices from the peak levels seen five years ago, aluminium has held up better. Prices are trading at about $1,500 a tonne, down 45 per cent in the same period. One likely reason for the relative price stability is supply reduction. Unlike mined ores such as iron, aluminium requires refining and smelters are shuttered when prices fall below production cost, supporting prices.

Nalco’s high-grade bauxite ore mines help the company to produce low-cost alumina — the raw material for making aluminium. Alumina prices have been relatively stable — down about 7 per cent in the last year to $300 a tonne currently. Margins in this segment improved to over 31 per cent in the September quarter, compared to about 29 per cent in the same period last year. Overall sales and profits are down 10 per cent and 36 per cent, respectively, in the first half of 2015-16, but alumina sales could continue to aid revenue and profit until aluminium realisations improve.

As local sale price in rupee is linked to global prices, any currency weakness will aid Nalco’s revenue.

HERO MOTOCORP: Riding through a challenging path

Parvatha Vardhini C

The Hero MotoCorp stock has been on a downtrend for most of 2015, losing about 20 per cent from a peak of ₹3,212 recorded a year ago. With two-wheelers facing weak demand, the stock may not move up in a hurry. But it may still be a good bet from a dividend yield perspective. The company has always been a benevolent dividend payer, and has declared dividends consistently at least for the last 15 years. The dividend yield for 2014-15 stands at 2.35 per cent.

Stuck in the rut

So far this fiscal, domestic two-wheeler sales volume has grown only by about 1.7 per cent, compared to the double-digit growth recorded by cars, trucks and buses. Lacklustre rural incomes due to factors such as erratic monsoons, low minimum support prices and tapering of rural job schemes, such as the NREGA, have impacted two-wheeler sales. With Hero MotoCorp having a big presence in bikes with up to 110 cc engine capacity that cater to rural demand, the company has seen a drop in sales volumes in this segment.

Scores well

However, the company has waded through challenging times reasonably well. For one, it has made further inroads into the 110-125 cc or the executive segment bikes (Super Splendor, Glamour and Ignitor), improving its market share in this segment by about 5 percentage points to 38 per cent now.

Higher realisations from these bikes, coupled with low input costs, have helped — for the half year ended September 2015, it recorded a 14.8 per cent growth in net profit to ₹1,522 crore.

It has also kept the interest going through periodic new launches and refreshments, such as Splendor Pro, Splendor iSmart, Maestro Edge and Duet. The Seventh Pay Commission award also bodes well for two-wheeler demand

Like a few other domestic auto manufacturers in the listed space, Hero MotoCorp is also cash-rich and has cushion to navigate through slowdown years without skimping much on dividends.

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