Powering Your Portfolio With The Energy Theme

By Vikas Bhattu, Director & Founder, Wealthvault Research & Analytics Private Limited

Vikas Bhattu, Director & Founder, Wealthvault Research & Analytics Private Limited

As the fourth-largest consumer in the world, India has a huge energy market. And it is set to expand more with energy demand surging as the economy rises at a rapid pace and per capita income increases.

Given that energy powers everything from households to industries to transportation to internet and telecommunications, it holds great importance in sustaining and furthering the India growth story.

Global climate commitments, rising purchases of energy intensive goods from an upwardly mobile population, renewable energy focus from the government and key reforms in the oil & gas sectors point to sufficient scope for the theme to play out as an attractive investment avenue.

Powerful potential

India’s energy consumption rose 50% from 24 exa-joules in 2011 to 36 exa-joules in 2022. However, the country’s per capita consumption is only 1181 KWh – China, South Korea, and the US have 3.3-12x higher consumption than India’s. With a rapidly growing economy, our per capita income may touch $5000 by 2030, twice the current level.

Surging demand: The country’s peak demand in solar hours is expected to increase by 40% from 252 GW in FY25 to 354 GW in FY30. The government is working to reduce any possible deficits.

Electric vehicles penetration is just 2% in India, compared to over 25% in China, thus giving scope for rapid growth and in turn higher power demand.

Data centres, AI tasks, chatbots and virtual assistants are all huge power guzzlers. India’s manufacturing push with thrust on exports will see heightened energy needs.

Renewable Energy thrust: The share of renewable energy in India is set to increase from 33% in FY24 to 53% by FY34. Renewable energy awarded under solar, wind, hybrid, etc. has more than doubled from 21 MW FY19 to 47.47 MW in FY24. Thus, the thrust for renewable power sources in the energy value chain is set to soar in the coming years to meet domestic demand and to adhere to global climate change norms.

Commitment to lower emissions: India has a target of executing 20% ethanol blending to fuel by 2025 and achieving 500 GW of renewable energy by 2030. As a commitment towards net-zero emission, renewables, electric vehicles, green hydrogen, biofuel, carbon capture & storage are set to see heightened interest.

Reforms push: The government has initiated several policies that have acted as catalysts to propel the energy segment. Focus on domestic coal production, privatization of power distribution companies, allowing better gas realization linked to crude, permitting OMCs to recover losses, capex towards gas transmission lines, LNG terminals and city gas distribution networks have helped profitability in the segment.

Outperforming theme

The energy theme has delivered robust performance over the past few years. In fact, the Nifty Energy TRI has outperformed the Nifty 50 TRI and the Nifty 500 TRI by a considerable margin across timeframes.

Performance Graph

Despite this outperformance, the Nifty Energy TRI still trades at a substantial valuation (price to earnings, price to book) discount to broader market indices.

Energy companies are underrepresented in the Nifty 50 index (8% weightage), despite accounting for 19% of the profits (May 2024). This leaves scope for the anomaly to be corrected in the future.

Investing in the theme by making it part of the satellite portfolio, after consulting a distributor or investment advisor could be rewarding over the long term.