For any economy, the backbone that sustains the path of growth is the energy segment. From supplying power to houses, fuel for transportation, supporting functioning of industries and for sustaining all telecommunications, energy takes many forms in its coverage universe.
As a rapidly growing large economy with rising per capita incomes, India’s energy requirements are going to increase sharply in the coming years.
Oil & gas firms (upstream, midstream and downstream), power companies (generation, distribution and transmission) across renewable and non-renewable segments and ancillary companies (battery makers, capital goods, equipment providers etc.) make-up the diversified energy segment.
Rising incomes and the resultant premiumisation, increased focus on manufacturing, climate change pressures, the country’s energy transition to net zero emissions and government’s reforms are factors that may play out favourably for the energy segment in the coming years.
Fuelling the energy theme
Even as the country set to become the third largest economy (USD 5.4 trillion) globally by 2027, India was the fourth largest energy consumer globally with a 6 per cent share as of 2022. India’s energy consumption nearly doubled (from 2007-2022) to 36 Exajoules. At 1181 KWhr per capita consumption, India’s figures are a fifth of China’s and a tenth of South Korea's, giving ample scope for growth.
Power requirement dynamics: From 252 GW in 2025, the country’s peak power demand in solar hours is expected to surge to 354 GW by 2030. During non-solar hours, the demand would increase from 231 GW to 326 GW. With peak power deficit set to touch 11 per cent during non-solar hours, there is likely to be greater focus on bridging the gap.
Premiumization push to consumption: India’s per capita income touched USD 2400 levels in 2022 (expected to double by 2030), which is considered as an inflection point for explosive consumption. This trend is set to accelerate in the coming years with higher disposable incomes.
From just 43 per cent of the population having access to electricity in 2000, India now has nearly 100 per cent coverage. India’s electric vehicle penetration was barely 2 per cent as of CY23, compared to high teens in the US and Europe and more than 25 per cent in China. Whether it be auto, outbound trips, air conditioners or refrigerators, at 4-18 per cent penetration, there is ample scope to catch up with China and later advanced Western economies. Even the ubiquitous smartphone or interconnection have long growth runways.
All these factors will ensure that energy consumption surges in the coming years.
Government reforms as enablers: Favourable oil & gas exploration and production policies worked. Better gas realisation by linking it to crude, abolition of auto fuel subsidy, capping upstream oil realisation, allowing oil marketing companies to recoup losses and united tariff via one nation one grid to ensure widespread gas consumption are a few other steps.
Building gas transmission lines, LNG terminals and city gas networks are also positive factors.
Power distribution companies’ privatisation, reforms in power transmission by imposing non-discriminatory general network access norms, smart metering and focusing on domestic coal production are added enablers.
Net zero commitments: India targets net zero carbon emission by 2070, necessitating a massive push for renewables, opening opportunities for existing and new players. Many targets on emission intensity, non-fossil fuel based generation etc. are due by 2030 itself. Renewable capacity awarded (solar, wind, hybrid, storage) has more than doubled from 22 MW in FY20 to 47.47 MW by FY24. Share of renewable energy may be 54 per cent by FY35.
Attractive valuations, strong outperformance
Tracking the theme, the Nifty Energy index has outperformed the blue-chip Nifty 50 TRI and the broader market Nifty 500 TRI comprehensively. Despite this outperformance, the Nifty Energy trades at a significant valuation discount – as measured by price to earnings (PE) and price to book (PB) multiples – to the Nifty 50 and Nifty 500. The dividend yield is also higher, adding to its attractiveness.
The need for taking separate exposure to energy as a theme becomes relevant from another data point. Although energy stocks account for 19 per cent of the Nifty 50’s profits, they have a representation only to the tune of 8 per cent in the index. There is thus a mismatch there.
The individual relevance of the energy theme from a long-term satellite portfolio diversification perspective can be decided after consultation with a financial advisor or distributor.
Data Sources - Avendus Spark Research, Citi Research, IMF, Elara Capital, IEA, Bernstein Analysis, CEA, Govt. Of India.
