Gaining From The Surging Energy Theme

From households using cooking gas and electricity, to petrol, diesel and power for bikes and cars, to energy requirements of a whole host of manufacturing and services industries, to supporting mobile communication and internet networks, the end-users of energy are ubiquitous.

Even so, the sheer enormity of energy’s importance lies not just in powering India’s growth story in the coming years. It is also about making the country sustainably future-ready to match the demand of emerging segments, meeting the global climate change requirements, and transitioning to renewables among a few other factors.

And amidst these dynamics, there lies an attractive investment opportunity.

Surging power requirements, rising disposable incomes leading to premium purchases that are intensive on energy demand, global mandates to achieve net-zero carbon emissions and government initiatives are set to propel the energy theme forward.

Surging prospects
As the fourth largest consumer of energy globally, India is also among the fastest growing large economies of the world at a rate of 8.2 per cent in 2023-2024. As the country grows to become a $5.3 trillion economy by 2027 (third largest), its energy needs would surge.

In 2000, less than half of India’s population had access to electricity. The coverage will become 100 per cent by 2022. As the per capita income doubles in 7 years from the $2500 levels currently, disposable incomes would rise.

Premiumization push: The penetration of automobiles, air conditioners, outbound trips, electric vehicles and refrigerators is only 2-18 per cent. In comparison, China and the US have 2-10x higher penetration on each of these. With increasing incomes, there is thus considerable runway for propelling premium purchases of energy intensive appliances.

Manufacturing focus: As manufacturing increases contribution to GDP from 15 per cent to 20 per cent by 2030 driven by government push, the segment would see a huge rise in energy demand. For perspective, when China focused on Manufacturing majorly from 2000-2010, its power demand increased at a 12 per cent CAGR.

Renewable energy transition: The share of renewable energy in the overall pie is set to double from 25 per cent in FY21 to 50 per cent by FY31. To meet the roadmap of net-zero carbon emission by 2070, India has to reduce emission intensity by 45 per cent, restrict non-fossil fuel based generation capacity to 50 per cent and increase carbon sink 2.5-3 bn tonnes of CO2 by 2030. To achieve these, ethanol blending and renewables usage would spike considerably.

Reforms help: Gas pricing reforms, favourable oil exploration and production policies, abolition of fuel subsidy and unified gas tariffs from the government have helped the energy companies considerably in the last 10 years.

Attractive investment opportunities
The energy theme has many sub-segments that hold robust potential. There are power ancillaries, firms in the oil value chain, green energy companies, entities in the gas and power value chains.

There are large, mid and small-cap companies available in the energy theme, making for a diversified mix of stocks. Just five energy companies in the Nifty 50 make up almost 19 per cent of the index’s profits as of May 2024.

The energy theme as represented by the Nifty Energy TRI is relatively undervalued compared to broader market indices such as the Nifty 50 TRI and Nifty 500 TRI on price-earnings and price to book multiples. Even the dividend yield is better.

Adding the theme can provide diversification to an investor’s portfolio. Distributors or investment advisors can help align the theme to your requirements.