Every investor is aware that there are risks associated with the equities market. Rightfully so, as it tends to reward people that remain engaged over an extended period of time, usually five years, even though it can be cruel in the short term. Investors find this challenging, particularly those who depend on it for consistent revenue.
What happens, at worst, if a person’s retirement funds are invested in the market but it exhibits extreme short-term volatility, as it does today? It certainly makes passive income generation difficult. Strong businesses that have a history of reliably paying dividends, however, can offer some stability.
To assist investors seeking passive income, we have discussed two businesses in this post that have solid foundations, a well-known brand, and regular dividend payments.
#1 Castrol India
A worldwide corporation, Castrol India is a division of Castrol Limited and a member of the British Petroleum Group, a major player in the oil and gas industry. It mainly produces and sells industrial and automotive lubricants, and its brand is well-known.
With 45 brands and around 600 brand variations, it serves 12 industries. Its dominance in the lubricant sector is demonstrated by the seven liters of Castrol it sells every second. With a market share of 38.7% for four-wheelers, 26% for two-wheelers, and 21.3% for commercial vehicles, it dominates all segments. Its fiscal year runs from January to December.
Over the past few years, Castrol India has established a reputation for rewarding shareholders and boosting dividends on occasion. In FY24, the dividend per share was ₹13, up from ₹5.5 in FY20. Its dividend yield for FY24 is 6.5% at its current price of ₹200.
Because the business operates in a sector with a consistent demand pattern, its financial data have shown continuous growth. From FY20 to FY24, its sales increased at a compound annual growth rate of 16% to ₹53.6 billion. With a significant margin of more than 20%, its profit after taxes has increased at a CAGR of 12% to ₹9.3 billion.
Due to rising volumes and a robust margin of 24%, its revenue increased by 6% and its net profit increased by 7% in FY24. Strengthening mechanic advocacy, growing its distribution network in rural regions, and introducing items that are in line with original equipment manufacturers were all factors in its volume growth.
In order to increase volume and market share, management is concentrating on developing the brand, expanding the distribution network, and introducing new goods. Because of the low automobile penetration, the company is still bullish and anticipates robust lubricant demand to last into the late 2030s and early 2040s.
Although electric cars (EVs) pose a significant danger, their uptake is anticipated to be sluggish. Castrol kept its forecast for CY25, aiming for a 22-25% EBITDA margin and growing at the industry average pace of 4-5%.
India continues to be the third-largest lubricant market globally, supplying 21% of Asia-Pacific demand and 10% of global demand. The industry includes the automotive, industrial, and marine sectors; overall demand is driven by the automotive (45%) and industrial (54%) segments.
Castrol India is in a good position to take advantage of new, fast-growing industries including electronics manufacturing, wind, aerospace, and defense. Furthermore, data centers are becoming important growth engines. As the market for high-performance cooling and lubricating products continues to expand, Castrol is prepared to help promote energy efficiency.
High inflation and ongoing crude oil price volatility, however, continue to be major issues since they could jeopardize the frequency of maintenance, including electrification. The price-to-equity multiple of 21.4 for Castrol is consistent with its 10-year median of 21.6.
#2 Indian Oil Corporation
Indian Oil is the biggest oil refining and marketing corporation in India and a Maharatna Public Sector Undertaking. It is found at every stage of the hydrocarbon value chain, from petrochemical and petroleum product marketing to refining, pipeline transportation, and exploration and production.
With 11 refineries under government control, Indian oil refineries account for a sizable portion of India’s overall capacity. Together, they account for over 31% of the nation’s total capacity for refining.
With the addition of its subsidiary Chennai Petroleum Corporation’s 10.5 million metric tonnes of annual refining capacity, its total refining capacity is 80.75 million metric tonnes. It boasts 12,908 distributors of liquefied petroleum gas, 39,000 retail locations, and a 20,000-kilometer pipeline network.
Indian Oil, a government-owned business, has a long history of reliably paying dividends. In FY22, the company distributed a dividend of ₹8.4 per share, yielding a 6.4% return. It distributed a ₹3 dividend the following year. The dividend rose to ₹12 in FY24, which, at the current price of ₹133, represents a 9% yield.
Strong operational efficiency was demonstrated by Indian Oil’s continued high capacity utilization, which was above 95% throughout the last three fiscal years and 100% for the two years ending in FY24. As a result, its net profit increased at a 134% CAGR to ₹396 billion, while its sales increased at an 11% CAGR to ₹8.67 trillion.
However, take notice that odd occurrences have had a favorable effect on Oil India’s profit growth. For example, the price of crude oil caused its net profit to drop to ₹13 billion in FY20. Suppressed marketing margins caused it to drop from a peak of ₹242 billion in FY22 to ₹83 billion in FY23.
Due to a decline in demand, its revenue in Q9 FY25 dropped 3% to ₹6.38 trillion from the prior year. Nevertheless, the gross refining margin dropped to $3.7 per barrel, from a high base of $12.1 per barrel, causing net profit to drop 85% to ₹54 billion.
The Russian crude oil basket’s reduced discount was the primary cause of this. On the other hand, its retail marketing margins in Q4 will benefit from the decline in crude oil prices. The volatility of foreign exchange and the price of crude oil continue to affect the company’s operations.
In the upcoming five years, it plans to carry out a number of projects with a total estimated project cost of ₹1.5 trillion. Additionally, during the next two to three years, the business anticipates a combined annual capital expenditure of ₹300 to 350 billion.
The majority of this capital expenditure will probably go toward expanding petrochemical and renewable power capacity as well as refinery capacity.
Conclusion
Castrol India and Indian Oil stand out for investors looking for a reliable source of income because of their good operating profiles and regular dividend payments. Both businesses have proven to be resilient and dedicated to rewarding shareholders, which makes them appropriate choices for a dividend-focused portfolio, even though market volatility is still a concern.