Five Blue-chip stocks have been identified for investment which meet the following criteria:
Beaten down price, growth visibility at reasonable price.
Minimal to zero Debt companies.
Higher Dividend Yield and Payout Ratio expected.
ROE, ROCE above 15%.
Market Capitalization of below 10,000 crore.
The blue-chip stocks are recommended for investment by Stewart & Mackertich, a well-known research house.
Each of the five blue-chip stocks recommended for investment has the potential to give heavy gains ranging from 23% to 71%.
The recent correction in the Indian stock market (Nifty down ~12% from peak of 28.08.2018) is a result of host of factors, both global and local. Among the global factors, sharp surge in crude oil prices (up from $71/barrel for Brent on 15.08.2018 to $86 on 03.10.2018, an increase of ~22% in less than two months.
Trade war rhetoric’s and implementation of the same by US and China and some other countries, flight of capital from Emerging markets to US and other safe haven due to robust US economic growth resulting in 75bps Fed rate hike in three instances till now in 2018 and expectation of another 25bps hike in next Fed policy – led to sharp spike in US yields which resulted in flight of capital from emerging Markets.
The sharp correction in the stock market has thrown up a number of opportunities to buy good stocks. These are stocks of strong fundamental quality, with good managements and track record
All these factors and widening trade deficit have resulted to sharp depreciation of the INR/USD by ~8% from INR68.40 to INR~74 to a USD from August 1st 2018 till October 5th 2018.
Besides the above factors, domestic political conditions have deteriorated with the ruling government losing some key state elections and fear of further damage in some ensuing elections, signaling a poor mandate in general elections of 2019 to the ruling government. This fear has led the government to take measures which further dent the fiscal situation of the country.
The recent dictate of the Government to OMCs to absorb INR1.00 in petrol and diesel, signaled roll back of price deregulation of the oil sector, which has severely affected investor’s sentiments.
We at Stewart & Mackertich Research believe this may be the last blow to the PSU sector, the sharp price corrections are overdone and some companies offer great investment opportunities.
When the BJP Government won with thumping majority, it was widely believed, as it was part of the manifesto of the BJP/ NDA that the PSU companies may see major reforms. Hence the BSE PSU sector outperformed with around 20% gains in the first few days of the formation of the Government.
However, over the past four years, due to the reasons cited above, the BSE PSU Index has sharply underperformed, down ~9% between 15.05.2014 to 05.10.2018, against Nifty and Sensex gains of around 44% (Exhibit 1).
It is interesting to note that a similar pattern was seen during May 2009- September 2013 of the UPA 2 regime wherein the BSE PSU Index had fallen by around ~9% and NIFTY had gained ~56% (Exhibit 2).
However, during the last six months of the UPA Government (Oct 2013– May 2014), the BSE PSU Index outperformed again (Exhibit 3).
6 High Dividend Yield Blue Chip Stocks
Investors looking for blue chip stocks with high dividend yield have a lot to choose from. There is a recent list of six blue chip stocks which offer a high dividend yield of as much as 7%, which is very attractive. The six stocks are all PSU companies which means that they are safe and the return of capital is assured.
We may not see a similar pattern this time around as the fiscal situation of the country has worsened and Crude oil prices and INR /USD are both adversely affecting sentiments and fundamentals.
However, if these two factors reverse, we may see the PSU shares revive again.
Never-the-less, general elections are just seven months from now and most factors get discounted in the market ahead of the events. Investors with a 12-18 months investment horizon can Accumulate/Buy fundamentally sound companies or companies with a strong visibility of earnings.
We have selected five stocks from the PSU segment with 5 key parameters, assuring that at least 3 parameters are met. The selection of stocks are from companies with market cap less than 10000 crores.
The Five key parameters are:
– Beaten down price, growth visibility at reasonable price.
– Minimal to zero Debt companies.
– Higher Dividend Yield and Payout Ratio expected.
– ROE, ROCE above 15%.
– Market Capitalization of below 10,000 crore.
*3 companies meet all 5 criteria
2 companies meet atleast 3 criteria
It is common saying that amongst adversity lies opportunity. The recent fall in PSU shares gives an excellent opportunity for long term investors with a 12-18 months investment horizon to accumulate some PSU shares. We have high conviction that these shares are likely to generate an average of ~30% annualized return in the next 18 months. Since the general elections are just seven months from now, sentimentally worst seems to have been factored into these stocks.
The Five broader factors for identifying the companies, besides the other rationales mentioned in the individual reports are as follows:
– Oil price shock is an eye opener to the Government to expedite significant investment in hydrocarbon sector.
– Huge investment plans by Refineries and pipeline companies in oil and gas sector (details in company note).
– Development of major ports.
– The New Mining Policy which is in the offing.
– Monetization of surplus Government land/ Building of smart cities / affordable housing projects.
The detailed rational and update on the companies are given in the ensuing pages.
Any unfavorable policy changes by the government with respect to the companies covered can be a key risk for our coverage.