With inflation ruling high at nearly 12 per cent, investments in debt instruments including bank deposits that offer about 10 per cent returns per annum have turned unattractive as the real rate of return works out to be negative.

Considering the other adverse factors like high crude oil and commodity prices and the economic slowdown being experienced in India and globally, even equities do not look attractive.

But, amid these gloomy times, there is a ray of hope in the form of high dividend yield stocks, which typically do relatively better during market downturns while offering reasonably good upsides when the investment environment turns favourable.

Judicious selection of stocks though is very crucial. For instance, it is advisable to consider factors like consistent track record (financial and dividend paying), company's strengths in its business and its market position, positive cash-flows, management quality, sound business model and ability to sustain growth rates.

If these are in place, it will at least ensure that the company sustains the dividend payouts, if not increase, even during bad times.

Now, if valuations are also reasonably attractive, it makes a strong case for investment. Here are 10 companies that offer healthy dividend yields and good potential for upside over the next 12-15 months.

Ashok Leyland
Despite a drop in truck sales (volumes), the company managed to record a 7.8 per cent growth in net sales to Rs 7,729 crore for FY08 on the back of a 51 per cent y-o-y increase in bus sales, engines (up 36.7 per cent) and spares (up 44.7 per cent).

Thanks to cost control measures and price hikes undertaken, operating profits grew 14 per cent (Rs 796 crore) and net profit by 6.4 per cent (Rs 469 crore) in FY08.

To diversify its revenue streams and plug the gaps in its product portfolio, the company has tied up with Nissan for light commercial vehicles (CV). Additionally, the company is increasing the proportion of non-cyclical businesses (bus, exports, engines and spare parts/defence kits) which contribute 33 per cent of the revenues. Its integrated manufacturing unit at Uttarakhand, which will be operational in this fiscal, will not only take care of market demand but also provide tax breaks. While the near-term may see some margin (higher input costs) and demand (rising interest rates) pressures, the medium-term prospects remain good as the CV cycle is expected to turn in favour of the manufacturers by FY10. At Rs 28.75, the stock is trading at 7.7 times and 6.6 times its FY09 and FY10 estimated earnings of Rs 3.7 and Rs 4.3, respectively, and can deliver about 30 per cent returns over the next 18 months.

Castrol India
Strong brands, technologically advanced products and customised offerings among others have helped Castrol's sales and net profits grow at a CAGR of 13.4 per cent and 19.3 per cent in the last three years, even as volume growth has remained muted.

The muted volume growth is mainly due to a shift in consumer preference towards high-tech products, especially in the auto lubricants where Castrol enjoys a market share of 21 per cent.

For instance, companies like Tata Motors have changed oil drain specifications for their commercial vehicles (CVs) for engine oils (doubled to 36,000 kms) and lubricants (increased to 72,000 kms), thus reducing the frequency of changing these consumables.

While this means lower consumption, it also means increased use of technologically superior products that support longer running of vehicles and hence higher realisations for lubricant manufacturers.

Technological advances in passenger cars have also meant increased demand for high-tech products. This is positive for Castrol, which has access to its UK parent's R&D.

The company has already entered into tie-ups with players like Volvo, Ford and Audi (cars) and Tata Motors (CVs), besides being the exclusive 'first fill' lubricant for Tata Motors' Nano.

Going forward, with India adding a million cars and UVs and over six million two-wheelers every year, demand for automotive lubricants will remain healthy. Increasing spends towards infrastructure and industrial capex also point to robust demand for industrial lubricants.

While concern over the surge in base oil prices exists, Castrol has raised prices in the past to offset the increase. The cut in import duty by half to 5.13 per cent on base oil in June 2008 also provides respite.

Overall, Castrol's revenues and profits are seen growing at 10-15 per cent annually over the next two years. At Rs 258.70, the stock trades at 12 times its CY09 (December ending) estimated earnings and can deliver 18-20 per cent in a year.

Clariant Chemicals
Despite rising input costs, Clariant Chemicals managed to record a 44 per cent increase in net profits to Rs 41.7 crore for the six months ended June 2008 (year ending is December). Net sales were up 7 per cent at Rs 466 crore.

The company has been able to increase its profits as a result of its ability to increase product prices, prune costs and benefit from a leaner organisation.

In dyes and specialty chemicals, which account for 55 per cent of its sales, the company is focussing on technical textiles, a fast growing segment expected to register an annual growth of 14 per cent till 2015.

While the company's sales of textile chemicals last year was impacted due to rupee appreciation as its customers (textile exporters) realisations came down. Margins in the second largest segment (40 per cent of sales) - intermediates and colours - though more than doubled to 14.1 per cent in the first half.

Going forward, the company is planning to focus on promoting the wider usage of safer pigments (lead/chrome replacement) and the usage of fluro chemicals and coating based products in the technical textiles segment.

With rupee showing some signs of weakening in 2008, the same should also prove beneficial for Clariant. At Rs 230 and considering annualised CY08 earnings of Rs 17.14, the stock is attractively priced at 13.5 times.

Great Offshore
Great Offshore' share price has corrected almost 66 per cent from its high of Rs 1,149 in January 2008, thereby available at a decent dividend yield of 4.11 per cent.

While the company has grown at a rapid pace in the past (sales at Rs 676.31 crore has doubled in last two years) and continuously paying dividends (up from 51 per cent in FY06 to 160 per cent in FY08), going forward, it is expected to maintain revenue growth on the back of firm oil prices and the resultant increase in offshore exploration and production (E&P) activities in the domestic and global markets.

The higher E&P investments will not only improve volumes, but will also increase realisation for companies, thanks to the shortage of offshore services. Great Offshore, which owns about 40 different types of vessels including rigs, platform support vessels (PSV), anchor handling tug supply vessels (AHTSV), multi support vessels is well placed to tap this opportunity. Besides, the company has also placed orders for a jack-up rig and a MSV (multi support vessels), which are expected to be delivered by May 2009.

With these fleet additions, the company can generate additional revenue of about Rs 300 crore in FY10, on the basis of prevailing rates. This reflects a 40 per cent increase over its FY08 revenue of Rs 745 crore.

Additionally, the company is also looking at inorganic growth by way of acquisition of semi-submersible deep water rig, marking its entry into the deep water drilling segment.

These factors will not only add to the revenues, but will also improve cash flow (cash profit margins of about 44 per cent), and thus a reason for higher dividends in future.

Notably, at current price, the stock is trading at attractive levels of 8 times and 5 times its estimated FY09 and FY10 earnings, respectively.

Rs crore Sales % Ch Net
P/E (x) P/BV (x) Mcap  Debt/equity
Precision Pipes 125.82 15.12 19.39 38.90 30.16 6.79 5.31 0.72 103.04 0.43
Sai Service 899.61 11.44 11.18 30.61 3.71 6.05 5.37 1.42 67.28 1.47
MRO-TEK 134.21 19.09 15.66 49.14 18.16 6.03 6.46 1.23 94.43 0.00
Atul 1013.68 11.29 36.62 42.77 9.83 5.68 4.13 0.53 156.81 1.28
Supreme Petroch. 1494.85 4.86 33.25 101.15 5.69 5.52 5.59 1.21 176.49 1.00
Banco Products 298.85 14.85 43.30 71.42 20.97 5.50 4.59 1.60 232.17 0.52
First Leasing 152.87 21.33 30.96 22.08


5.48 3.02 0.52 93.55


Kabra Extrusion 145.79 15.18 14.51 99.86 15.74 5.41 6.41 1.19 88.50 0.12
Nag. Agrichem 414.82 17.76 25.75 21.29 17.33 5.39 5.05 1.15 124.42 1.02
Kanoria Chem. 432.23 0.49 30.50 56.41 22.38 5.09 5.47 0.70 165.74 1.72
Bodal Chemicals 406.33 59.87 17.77 59.09 10.34 5.00 4.39 1.35 78.00 1.58
* Dividend yield, PE, P/BV and Market capitalisation are as on July 21, 2008, Companies with Mcap less than Rs 250 cr

HCL Infosystems
HCL Infosystems, a leading player in the personal computer (PC) and enterprise hardware segment, has seen its share price decline 57 per cent from its peak in January 2008.

This is partly due to the market correction besides, concerns over growth in its telecom business (distribution rights for Nokia GSM phones) and slowdown in the domestic PC demand.

However, these concerns are temporary and pertain to the rising PC prices and high interest rates impacting PC demand. However, the company is still expected to maintain a growth of 20-22 per cent on the back of growing PC penetration in the country and the initiatives of e-governance.

The PC penetration in the country has tripled to about 18 per 1,000 people in 2006, which the government targets to increase it to 65 per 1,000 people.

HCL Infosystems markets under its own brand and has captured 15.5 per cent market share in the domestic desktop segment and 7.4 per cent in the laptop segment. Even as the desktop market is growing at 20 per cent, the laptop segment is growing faster.

HCL Infosystems, which is considered to be among the low cost manufacturers of laptops will benefit from the higher demand.

Also, a part of its growth will be led by its distribution rights for the sales of Nokia's GSM phones (even as 50 per cent of the distribution rights have been returned back to Nokia), mainly the replacement market for GSM phones.

Plans to enter into distribution alliance with Kodak and Apple are also taking shape. At Rs 129.80, the stock trades at 5.8 times CY09 (June ending) estimated earnings and offers a dividend yield of 6.31 per cent.

The woes of oil marketing companies (OMC) like HPCL are well known and a consequence of the government's mandate of sharing subsidy on retail fuels.

But, what provides comfort is that despite some delays in issuing of bonds and uncertainties over the quantum of subsidy to be shared by OMCs, companies like HPCL have not reported a loss on an annual basis.

For HPCL, it has a long track record of paying dividends, except in 2005-06, when it gave a dividend of just Rs 3 per share.

For the time being, for OMCs, some respite has also come in form of crude oil prices falling to below $125 a barrel. If the trend continues, the under-recoveries (subsidy) for OMCs should also decline.

The funding facility to OMCs, wherein they can sell oil bonds to RBI in return for cash, is also positive and will help lower debt levels and interest expenses for these companies. For HPCL, it held bonds in excess of Rs 6,000 crore in FY07, while loans were at Rs 10,500 crore.

In terms of business prospects, the firm trend in global refining margins augurs well for HPCL (refining capacity of 13 million tonnes per annum). These, along with a 25 per cent increase in refining capacity, should enhance refining profits.

The company's 10-20 per cent stakes in over 22 oil & gas blocks, stake in city gas and CNG distribution (jointly with Gail) businesses, investment in MRPL (17 per cent stake worth Rs 2,000 crore) and a vast marketing network of over 8,000 petrol pumps, are some valuable assets that are perhaps not reflecting in the stocks valuation.

LIC Housing Finance
Among the top five housing finance players, LIC Housing derives over 90 per cent of its income from loans disbursed to retail customers.

Since the past two years, the company has turned aggressive in terms of growing its business, improving efficiencies and enhancing its risk management capabilities.

The benefits: contrary to under 10 per cent net income growth largely seen earlier, net income has risen 17 per cent and 41 per cent while profit growth has been robust at 34 per cent and 39 per cent in FY07 and FY08, respectively.

For Q1FY09, net interest income grew 43 per cent to Rs 150 crore and net profit was up 124 per cent to Rs 105 crore (partly due to lower provisioning) compared to Q1FY08.

Improving risk management skills have also led to LIC Housing's net non-performing assets (NPAs) decline from 7 per cent in FY05 to about 1 per cent in FY08. Even as the macro environment has turned difficult, analysts don't expect net NPA levels to rise significantly.

Notably, its net interest margins (NIMs) have remained robust at over 2.8 per cent in FY08 (2.4 per cent in FY07), as the company has been able to pass on the increase in costs and a large part of the loans given are on floating basis.

While NIMs are expected to remain at current levels, the company's loan book and disbursals are likely to grow by 25 per cent annually in the next two years; profits growth seen between 20-25 per cent.

The company's foray into distribution of third party products through its subsidiary should add to its income and profits. The stock is up 30 per cent in one week (after announcement of Q1 results) to Rs 306. Investors may hence, like to wait for some correction before buying.

Rs crore Sales % Ch Net profit % Ch PBIDTM (%) Dividend Yield (%) P/E (x) P/BV (x) Mcap  Debt/equity
H P C L 104703.76 17.59 1134.88 -27.77 2.63 8.42 6.39 0.82 7251.48 0.94
Varun Ship. Co. 932.57 38.65 225.78 59.73 62.12 7.80 4.56 1.18 961.50 2.44
GIC Housing Fin 271.48 38.48 56.40 12.64


7.68 5.32 1.02 280.29


HCL Infosystems 11648.12 407.61 317.85 180.74 3.89 6.31 6.71 3.26 2168.47 0.35
Castrol India 1888.30 7.75 218.40 41.37 19.30 5.77 12.02 6.96 3001.36 0.01
Automotive Axles 611.66 32.47 53.63 23.71 17.41 5.73 6.02 4.57 329.40 0.71
Tata Metaliks 1033.38 51.71 69.62 135.92 13.65 5.46 4.36 1.68 324.47 0.59
Ashok Leyland 7729.12 7.83 469.31 6.35 11.25 5.41 8.87 2.21 3691.58 0.38
CEAT 2329.97 9.14 148.60 278.60 12.33 5.39 2.96 0.75 254.06 1.10
T N Newsprint 938.53 9.79 112.83 31.11 28.01 5.09 5.48 1.04 611.82 0.90
Clariant Chemicals 861.44 25.38 31.79 -3.29 8.36 5.08 8.58 2.10 524.67 0.02
Lak. Mach. Works 2205.16 18.97 242.30 17.51 22.09 4.31 5.60 2.61 1291.61 0.00
Great Offshore 676.31 25.98 203.21 43.69 56.84 4.11 8.91 3.29 1484.20 1.11
Greaves Cotton 1215.83 29.40 122.32 43.75 14.43 4.05 7.33 3.55 843.47 0.18
Savita Chemicals 918.98 13.05 61.96 31.08 11.13 4.05 5.24 1.53 324.63 0.22
LIC Housing Fin 2089.40 35.05 387.19 38.71


3.89 4.91 1.30 2187.22


* Dividend yield, PE, P/BV and Market capitalisation are as on July 21, 2008, Companies with Mcap above Rs 250 cr

Savita Chemicals
On the back of higher product prices and stable base oil prices, Savita Chemicals, a manufacturer of petroleum specialty products, recorded better than expected results for FY08.

It reported a 13 per cent improvement in net sales to Rs 919 crore and over 30 per cent increase in net profit to Rs 62 crore. Its operating profit margins of about 10 per cent is likely to come down as high crude oil prices could increase the price of its raw material-base oil.

A 20 per cent growth rate in the transformer oil market of Rs 1,500 crore should benefit Savita Chemicals as this segment accounts for 65 per cent of its revenues.

The company is expanding capacity by 50,000 kilo litres (kl) to 2.6 lakh kl at a cost of Rs 10 crore. The entry of new transformer manufacturers and the planned capacity additions on the power generation side is expected to increase demand for transformer oil, which augurs well for the company. At Rs 253, the stock is available at an attractive 6 times it's FY09 estimated earnings of Rs 44 and should fetch decent returns.

TN Newsprint
Tamilnadu Newsprint & Papers, one of the leading integrated players in the paper industry, offers a dividend yield of 5 per cent and trades at a reasonable 4.8 times its FY09 estimated earnings.

The company has been growing consistently in terms of revenue and cash profits. This is primarily on account of growing demand for paper.

The growing economy and particularly the growth in print media have been the prime reasons for the higher paper demand.

Driven by higher demand and the benefits of its backward integration, the company has been able to sustain margins at about 26 per cent (among the best in the industry) even as input prices have been on the rise.

Going forward, the benefits will also accrue on account of ongoing capacity expansions, whereby the company is increasing its pulp (raw material) production capacities from 170,000 tonne to 260,000 tonne by Q4FY08 and paper capacity from 230,000 tonne to 400,000 tonne expected to be commissioned by June 2010. These expansions will help the company to effectively manage input costs and simultaneously sustain growth rates.

Varun Shipping
Varun Shipping has been paying dividend consistently for the last 23; its annualised dividend has gone up from 15 per cent in FY01 to 50 per cent in FY08. Post market correction, its stock is attractively valued at just 4 times its estimated FY09 earnings and offers a dividend yield of 7.8 per cent.

The company owns a well diversified fleet of 21 vessels, which includes 12 LPG carriers, 3 double hull Aframax crude tankers, a product tanker and 5 AHTS vessels.

Since Varun is a leading player in LPG transportation accounting for 70 per cent of all PSU-controlled incoming LPG cargoes, it will benefit from the growing investments in the oil and gas sector. Also, Varun will stand to gain on the growing demand for the energy in India and its dependence on the imports.

Not only volumes, rising freight rates on account of higher demand and shortage of vessels should lead to higher margins. A part of this is also visible in its PBIDT margins, which have gone up from 55.7 per cent in FY07 to 62.12 per cent in FY08. Besides, it entry into the growing offshore segment, where the demand and the realisations are relatively high, should further help increase revenue and margins.

It has recently taken delivery of a third Anchor Handling and Towing Supply Vessel (AHTS). This is a specialised vessel which is used for deep sea oil exploration activity.

As a result of its efforts, contribution of offshore revenues to total revenues has gone up from mere 3.55 per cent (Rs 23.9 crore) in FY07 to 19.46 per cent (Rs 165.5 crore) in FY08. Apart from good dividend yield, the stock can deliver about 20-25 per cent in the next one year.

dividend yield and sound business prospects provides the twin advantage of a consistent cash inflow and potential for capital appreciation.

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