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7 min Read

Flattening of the curve—a heartening sight.
Flattening of wallets?
Your expression sums it up!

It seems, as much we need to learn to live with the virus, we must also brace ourselves to live with lower interest rates. High retail inflation combined with lower FD rates may cause wealth erosion in real terms. This may not be a permanent phenomenon, but it certainly requires your closer attention.

Insipid interest…

(Source: Respective bank disclosures)

RBI has lowered policy rates to deal with the negative impact of COVID-19 on the economy. However, it’s now creating problems for the conservative investors who usually don’t look beyond bank FDs.
Coronavirus pandemic is often blamed for the high retail inflation— after all supply chains are affected; it hampered the free movement of people as well as goods. Well, there’s no denying the situation at the grassroots level but how about the average rate of retail inflation hovering at 6.3% for the past 1 year?

Out of comfort zone…

Interest Rates

(Source: RBI)

If you carefully observe, inflation started drifting out of RBI’s comfort zone (of 6%) well before coronavirus pandemic hit us. RBI’s households’ inflation survey conducted in September 2020 reveals that 54% of households expect inflation to be higher than the current rate in the next three months. Since the entire banking system is awash with liquidity and there isn’t much credit offtake, we are unlikely to see any increase in the interest rate on deposits in a hurry.  There’s almost a consensus among economists on this.

What do we do? We have two options, crib about the present situation or deal with it intelligently.

Here we go with the second option…

First off, let’s not put all our eggs in one basket. You should chalk out an asset allocation plan for yourself as soon as possible, if you haven’t got one already. 

Your asset allocation plan should take into account:

  • Your risk appetite
  • Household expenditure pattern
  • The level of dependency on your income
  • Your long term and short term financial goals
  • Time left to retirement

The list above isn’t exhaustive.

After doing this exercise, if you find that you are relying excessively on fixed income instruments, such as fixed deposits, it’s time to diversify. Your portfolio should have assets that share a negative co-relation with one another—fixed deposits, gold, stocks, etc. Under normal circumstances, they all don’t move in tandem.

Did you know, by the way, the dividend yield on 33 of BSE 500 stocks is higher than the interest rate offered by the leading banks on a 5-year fixed deposit? To arrive at this number, we excluded the companies declaring one-time/special dividends which may not be sustainable in future.

When you invest in a stock, your total return chiefly depends on two factors—capital appreciation and dividend income. But many of us seem to have forgotten about the latter.

In simple words, dividend yield tells you what the dividend amount is, as a percentage of the company’s current market price. It’s noteworthy that the dividend payments aren’t guaranteed.

Each company has its own dividend policy. The payment of dividend primarily depends on several factors such as the requirement of cash in the business, level of debt on books, expected growth in profits and expectations of shareholders, among others.

Dream 11: Ye dividend ka game hai

^Market price data as on October 20, 2020
#Dividend yield is calculated on FY20 dividend amount taking into account market price as on October 20, 2020
*Total dividend accrued in FY20 is considered
TTM: Trailing Twelve Months
@ Payout ratio shows the dividend payout as a percentage of FY20 PAT
As you may have observed in the list above, PSU companies have been paying dividends generously.

And here’s the reason…

According to the guidelines of Department of Investment and Public Asset Management (DIPAM), every CPSE (Central Public Sector Enterprise) has to pay a minimum annual dividend of 5% of the net worth or 30% of PAT, whichever is higher, subject to the maximum dividend amount permitted by law.  

Of late, PSU stocks have come under the weather and they aren’t popular amongst investors. Policy flip-flops, governance, nature of their businesses and cyclicity have affected many of them. As a result, they are trading at multi-year low valuations and have already witnessed enormous price erosions.

But it would be unintelligent to measure all of them with one scale.

The idea is to identify companies that are growing yet paying regular dividends and more importantly following conservative dividend payment policies. If their payout ratio is too high at present, and if their income falls in the subsequent years, the fall in the dividend payment would follow.

Identify companies that are relatively unaffected by the pandemic…

Indian Railways has been in the news lately. According to media reports, the Indian Railways is planning to spend Rs 2 lakh crore every year until FY24 on various developmental projects. These include electrification of the entire railway network, improving port connectivity and coal linkages through rail network and doubling of 11,000 Kilometers of tracks, upgrading the speed of trains and developing dedicated fright corridors amongst others. Besides this, allowing private players to operate passenger trains is expected to bring in investments worth Rs 30,000 crore.

To support such a massive facelift programme, the government has also restructured the Railway board by streamlining operations and consolidating seven departments into four.

On this backdrop, companies catering to the railway sector may do well. Two companies focusing on the railway capex caught our attention—RITEs and Rail Vikas Nigam Limited (RVNL). Besides offering an opportunity to capitalize on the development of India’s rail sector, both companies have an attractive dividend yield.  


RITES is a leading Miniratna company that offers engineering consultancy services—right from the conceptualization to commissioning of projects—to the transportation and related infrastructure sectors. It also undertakes turnkey construction projects which contribute ~25% to its revenues. Consultancy fee income accounts for a fourth of its top line and another 20% comes from export markets.

The company has a good revenue visibility for the next couple of years at least, as depicted by its healthy order book position of Rs 6,223 crore—2.3 times of its FY20 consolidated revenue, as on March 31, 2020.

RITES paid the dividend of Rs 16 on aggregate basis thereby distributing 64% of its FY20 consolidated PAT among shareholders.


RVNL is a focused play on Railway infrastructure development in India. What makes it stand out is the mandate it enjoys. It undertakes planning and implementation of rail infrastructure projects on a fast-track basis. The scope of work includes the construction of new lines, track doubling, building bridges, gauge conversion, electrification of railroads and construction of railway workshops amongst others.

The company also has a mandate to arrange human and financial resources, form JVs wherever required for the execution of projects. In other words, the company doesn’t rely entirely on the budgetary outlay to the railway sector and enjoys high flexibility to implement key projects.

As on March 31, 2020, the unexecuted order book of the company stood at ~5 times its consolidated top line which gives a high revenue visibility. Historically, the dividend payment policy of the company has been conservative, i.e., it doesn’t go overboard with dividend distribution even if it clocks substantially higher profits in any year.  

REC Limited

REC is a Navratna company. It offers financial assistance to power sector companies across the value chain—generation, transmission and distribution. The one-year performance of the company isn’t impressive but REC assumes a crucial role in government’s ambitious plan to transform India’s energy landscape.

The share of private sector in REC’s loan book as on June 30, 2020 was merely 11%. State government entities and joint sector units account for 82% and 7% respectively. REC had the total outstanding loan book of Rs 3.31 lakh crore as on June 30, 2020 with top-10 borrowers accounting for ~39% of it.

Between March 2019 and June 2020, the gross non-performing assets ratio of REC has dropped from 7.24% to 6.11%. Moreover, the Net Non-Performing Assets (NNPA) stood at 2.88% against 3.79% as on March 31, 2019. As per Q1FY21 numbers, the company earned the yield of 10.53% on its loan book whereas its borrowing cost aggregated to 7.19%.

REC recently received the shareholder’s nod to raise the borrowing limit to Rs 4.5 lakh crore from the existing limit of Rs 3.5 lakh crore. The net borrowings of the company as on March 31, 2020 were Rs 2.8 lakh crore. On August 10, 2020 Crisil reaffirmed “AAA” rating on REC’s long term debt and A1+ on the short term debt along with assigning the stable outlook—a confidence booster. High credit rating and enhanced borrowing limit may bode well for its future growth.

Some private sector companies aren’t far behind…

Telecom companies have indeed benefited from the Work-From-Home (WFH) culture and increased data consumption by individuals. But make no mistake. We aren’t talking about debt-laden-price-war-stricken telecom operators, but a tower company—Bharti Infratel.

Bharti Infratel

Post its merger with Indus Towers, the company now enjoys ~29% market share in the tower business. Despite operating in a capital intensive industry, the company has the Net Debt to EBITDA of 0.9 times its FY20 earnings (includes lease liabilities). The company looks well-placed to take advantage of the medium to long term growth opportunities in the post COVID world which include the likes of 5G, connected devices and smart cities amongst others.

Read our full coverage on Bharti Infratel 

Likewise, every company mentioned previously in this article has its own pros and cons. keeping in mind the scope and length of this article; we are restricting ourselves to just four. But that doesn’t necessarily mean they hold any special advantage over others.

While we discover more such stories that matter the most to your portfolio, it’s your turn to make your dream-11.

Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.


You may also like to read: 6 essentials of a long-term equity portfolio


We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:

Consult your financial advisor before taking any investment decision.

We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflicts of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.



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