Inorganic Expansion On Agenda Of Energy CEOs To Drive Growth: KPMG Report
The report states that the sector is ripe for deals and consolidations, marking the end of softening in the deals market
Energy, Natural Resources, and Chemicals (ENRC) CEOs are emphasising inorganic expansion to double down on their ambitious growth targets, according to a KPMG report gauging the industry's outlook.
The report, 'KPMG 2024 ENRC CEO Outlook,' says that nearly 30 per cent of the surveyed CEOs identified mergers, acquisitions, and strategic alliances as key to their growth plans. This represents a shift in strategy, as inorganic growth has slightly overtaken organic expansion (highlighted by 27 per cent of CEOs) as the top approach to driving their business forward.
"The deals market in ENRC has been soft for some time, but every cycle must eventually come to an end. The sector is ripe for deals and consolidation," says Anish De, Global Head, ENRC, KPMG.
De explains that energy systems are becoming more complex, involving solutions like solar power and the integration of storage and transmission infrastructure.
"As the energy sector grows and transforms, new opportunities will arise for companies with capital to invest in these complex systems. A cycle of building, asset flipping, and consolidation is anticipated, leading to more M&A deals in the near future," says De.
De notes that in the context of India, value unlocking is a big theme.
"Today, people are going to the capital markets. Then eventually it will be a combination of capital markets and inorganic growth through private acquisitions. So, value unlocking is a big theme in India, whether you done through capital markets or a trade sale," says De.
Inflation proofing capital
The report also notes industry leaders' focus on inflation-proofing their capital as the primary lever to achieving growth.
"Inflation has been falling globally and there is the prospect of interest rate reductions in key markets, including the United States, contributing to a more bullish outlook," the report says.
However, De signals a bit of a caution on the inflation front.
While the recent softening of inflation is positive for infrastructure-heavy sectors, De says, caution is still necessary as inflation could surge unexpectedly.
"Although the Federal Reserve has started cutting rates, inflation will likely remain higher than in the past. Companies need to be prepared for a certain level of inflation and should develop strategies that account for this possibility," asserts De.
Embracing AI
The report notes that energy CEOs are proactively embracing GenAI into their business strategies, viewing it as a long-term investment that will take time to deliver tangible results. 65 per cent of ENRC leaders believe it will take three to five years to see a significant return on investment (ROI) from GenAI.
While AI has already been used in specialist applications in the energy industry for years, De stresses the complexity of energy systems.
"The complexity of energy systems means that large-scale AI integration requires more extensive system transformations. This realisation is slowly dawning on energy CEOs, and more companies are now adopting AI solutions," says De.
He adds that AI in energy is not just about technology but also involves combining services and assets, which makes its implementation more challenging.
