After an 18-month rally on Dalal Street, the market dynamics have changed suddenly. The twin tailwinds of record low interest rates, quantitative easing by the central banks and record fiscal stimulus by the developed countries and China are now coming to an end.
The Federal Reserve has indicated that it will phase out its bond buying programme by the end of March next year and there could be seven rate hikes by the end of December 2023. This may raise the yield on 10-year US government bonds to nearly 3 percent by the end of 2023 from around 1.5 percent currently. THere would be a similar rise in interest rate in India.
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This has resulted in a rise in the bond yields in the United States signalling the end of low interest rate regime and the beginning of high interest rates era. This is led by repricing of risk assets including stocks and long-term investors have begun to rejig their portfolio.
At the same time the economist and the market analysts are worried about a further rise in inflation fuelled by higher energy and power costs. This has been exacerbated by a sharp rise in natural gas prices in Europe, power shortages in the United Kingdom and China and a rally in crude oil prices. The Brent Crude oil price is up nearly 20 percent in the last one month and has almost doubled from the 2020 average price.
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This has begun to filter into India as well. The natural gas prices are up in the domestic market and electricity prices are up at the energy exchanges.
Most energy analysts expect energy prices to remain high in the near to mid-term as governments across major economies are shutting down coal fired thermal power plants in a bid to cut carbon dioxide emissions. This has led to a sharp rise in the demand for natural gas and higher price for electricity.
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This will hit the earnings and profits of consumer goods and manufacturing but it is positive for energy producers and power companies such as ONGC, NTPC, Coal India and Power Grid among others.
The companies also generate a large amount of cash flow from their operations and pay generous dividends.
Coal India for example is up 27.4 percent during the month of September so far while NTPC and ONGC are up 21 percent and 20 percent respectively.
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However, they can rally even further as they are among some of the cheapest stocks in the market right now on parameters like price to earnings multiple, price to book value and cash profits to market capitalisation.
Here are ten utilities and energy companies that remain cheap and offer good upside potential in a volatile market. Most of these companies are also among top dividend payers in the corporate sector with attractive dividend yield at their current share price.
The public sector oil & gas producer ONGC tops the list with P/E multiple of 11.2X and price to book value of 0.8X.
It is followed by Oil India that is trading at P/E of 7.8 and price to book value of 1.2X. Other stocks in our list include NTPC, Hindustan Petroleum Corp, NHPC, Power Grid Corporation, Gail (India) , BPCL, Gujarat State Petronet and Torrent Power.
(Advice: This article is for information purpose only. Readers are advised to consult a certified financial advisor before making investment in any of the funds or securities mentioned above.)
(Karan Deo Sharma is a Mumbai-based finance and equity markets specialist).
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