In this article, we will cover
- Understanding the Energy Sector
- List of Best Energy Stocks in India
- Overview of the Oil and Gas sector in India
- Overview of the Power sector in India
- Different parts of the Power sector
- Portfolio Companies of Energy Stocks
- Model Portfolio of Best Energy Stocks
So First Let’s Understand the Energy SectorThe energy sector is one of the most crucial elements for an economy. The industry includes the Oil & Gas industry, the Coal mining industry, the Power generating industry, and the power distribution industry.
What is the Oil and Gas sector?Crude Oil is the primary component for the energy industry and is the most important commodity in the world. Oil & Gas basically includes products drawn out from crude oil which is extracted by oil drills. Crude oil is further refined to produce products such as petrol, diesel, ATF (aviation turbine fuel), kerosene, heating oil, LPG and CNG among others.Crude oil not only fulfils energy needs ranging from running cars to generate electricity but is also the key component used to create plastic, paints, lubricants, and asphalt (used for building roads) among others making it key for both energy and consumption.
List of Best Energy Stocks in India 2022
|S.No.||Name||NSE Code||BSE Code||CMP Rs. Dec'2022 (₹)||RATING|
|8||Adani Total Gas||ATGL||542066||3,607||3|
|17||Power Grid Corpn||POWERGRID||532898||216||0.5|
|19||Tata Power Co.||TATAPOWER||500400||208||0.5|
The sector is divided into 3 segments:
- Upstream segment – engaged in exploration and production (E&P) of crude oil. Companies in this segment are usually characterized with high investment capital, extended duration as it takes time to locate, drill and be technologically intensive. Examples include ONGC which is engaged in oil exploration and extraction.
- Midstream segment – engaged in storage and transportation. Companies in this segment are characterized by shipping, trucking, pipelines, and storing of the raw materials. The midstream segment is also marked by high regulation, particularly on pipeline transmission, and low capital risk. IOCL and GAIL are engaged in the storage and distribution of crude oil.
- Downstream segment – engaged in refining, processing and marketing of oil. IOCL and Reliance.
Overview of the Oil and Gas sector in IndiaIndia is the 3rd largest consumer of energy as well as oil. As on May 1, 2021, India’s oil refining capacity stood at 259.3 MMT (million metric tonnes), making it the second largest refiner in Asia. India is pegged to increase this capacity to 667 MTPA (million tonnes per annum) by 2040. Private companies own about 35.19 percent of the total refining capacity in FY21. The energy demand is expected to double to 1,123 Mtoe (million tonnes oil equivalent) by 2040 in India. The consumption grew by 4.5% in FY20 to 213.69 MMT while the crude oil production stood at 32.2 MMT. Crude oil production in FY21 was recorded at 30.5 MMT.India has proven reserves of 4,700 million barrels (1 barrel = 159 liters) and produced 37.5 million barrels in 2019. India has imported 3.96 MBPD (million barrels per day) as well as produced 0.61 MBPD in FY21, indicating that imports contributed to over 87% of total oil demand of 4.57 MBPD.On the LNG front, India is currently the 4th largest importer in the world with imports at 33.68 BCM (billion cubic meters) for FY21. The total gas consumption stood at 60,646 MMSCM (million metric standard cubic meter) for FY21. The natural gas pipeline length overall stands at 17,126 kms for FY21 of which GAIL has the largest share at 11,884 kms. The government of India plans to spend US $2.86 billion towards upstream oil and gas production to double the natural gas production to 60 BCM and drill over 120 exploration wells by 2022.The LPG pipeline stands at 18,465 kms as of March 01, 2021 with IOCL currently having the largest share of the pipeline at 50.91%. The top 3 companies (IOCL, HPCL and BPCL) currently command over 80% of the total pipeline in India.
The Oil and Gas industry offers multiple opportunities including:
- Upstream Segment: 78% of the sedimentary area is yet to be explored; Secondary and Tertiary oil techniques.
- Midstream Segment: Expansion of gas pipelines and LNG imports have increased, thereby giving an opportunity to boost production capacity in segments such as terminal operation, engineering, procurement and construction services.
- Downstream Segment: India has 21 refineries and expansion is planned with FDI in export-oriented infrastructure, including product pipelines and export terminals; the development of CGD (city gas distribution) in many cities (including Tier 2 and 3 cities); and the expansion of the petroleum product distribution network.
When looking at investing in companies from the sector, one needs to assess the following factors:
- Investors need to look at the volatility and oil price trend since these are driven by multiple factors globally. Investors need to look at both WTI and Brent crude, the two primary crude prices used globally. India uses Brent crude prices to price oil and accordingly should be given more importance. Oil companies usually have hedges in place which should be assessed based on gains/losses from these contracts.
- Investors need to identify which segment of the industry does the company serve among the upstream, midstream and downstream segment. This is crucial as companies in the upstream segment derive profits from higher global crude oil prices, in the case of India, higher Brent prices. For the other segments, profits are made from the difference between crude oil prices and prices of finished products such as petrol, diesel, ATF, etc. Due to this difference being low, the operating margins range between 5-15% but these companies are known to generate healthy cash flows. Downstream oil companies also tend to be less volatile due to costs and revenues both adjusting to changing oil prices, unlike oil exploration companies which are directly affected by oil price volatility.
- Assess the reserves held by the company in proportion to how much has been extracted which can give investors an idea about the need for further capex towards drilling wells and processing of oil. Assess the refining throughput and the proven reserves held by the company. For midstream oil companies, assess their gas pipeline network. For downstream oil companies, assess the company’s refining throughput and refinery production.
- On the financial front, assess the amount of debt the company holds, specially the E&P companies as the debt obligations are mostly fixed while earnings can be affected by crude oil price volatility therefore the company should at least have enough earnings to cover costs and debt obligations. Assess the interest coverage ratio and the debt/equity ratio.
- Assess the operating cash flows generated by the companies along with the dividend payouts made by these companies. Since most companies in this sector trade at decent valuations, assess the price ratios as well as the EV/EBITDA ratios.
Overview of the Power Sector in IndiaIndia is the 2rd largest producer and consumer of power in the world with installed capacity of 388.13 GW (gigawatts) as of August 2021. In renewable energy, India is ranked 4th in wind power and 5th in solar power capacity with renewable power capacity at 100.68 GW which is estimated to rise to 227GW by 2022 and double its share in electricity capacity to 40% by 2030. Installed capacity of renewable, hydro and nuclear energy totaled 100.68 GW, 46.41 GW and 6.78 GW, respectively. Power is generated from 4 channels in India:
- Thermal: This segment contributes to 60.36% (vs 61.5% in FY21) of total power capacity and is drawn from Coal, Gas & Lignite and Diesel based power plants. Coal is the largest among these with installed capacity of 202.20 GW in 2021; Gas & Lignite plants have installed capacity of 31.54 GW as of 2021; Diesel is the smallest among the 3 with installed capacity of 0.51 GW as of 2020. The total capacity stands at 234.72 GW.
- Renewables: This segment contributes to 25.94% of total installed power capacity. Of the renewables, Soalr is the largest power generator at 41.08 GW followed by wind power at 39.44 GW as of 2021.
- Hydro: This segment contributes to 11.96% of total power capacity with power generating capacity of 46.41 GW as of 2021.
- Nuclear: This is the smallest energy segment, contributing to 1.75 % of all installed capacity in India at 6.78 GW as of 2021.
Different Parts of the Power sectorPower companies are divided into three parts, Gencos (Power generating companies), Transcos (Power transmission companies) and Discoms (Power distribution companies). The gencos are engaged in the generation of electricity which is then transferred over to transcos which are engaged in transmission of electricity from one location to another to various discoms. Discoms buy this power from either transcos or directly from gencos and transfer the same to final consumers such as industrial, commercial and domestic consumers. The discoms charge the final consumers for electricity consumption (based on Units consumed) which is used to purchase power from transcos and gencos.India saw electricity generation (including renewable sources) of 1,234.44 BU in India in FY21, the country witnessed de-growth of around 11.10% over the previous fiscal year. Under the Union Budget 2021-22, the government has allocated Rs. 15,322 crore (US$ 2.11 billion) for the Ministry of Power and Rs. 5,753 crore (US$ 794.53 million) for the Ministry of New and Renewable Energy. For 2021-22, electricity generation target from conventional sources was fixed at 1,234.44 BU, comprising 1032.39 BU of thermal energy; hydro energy (150.30 BU) and nuclear (42.94 BU); and 8.79 BU was imported from Bhutan. According to the Ministry of Power, India's power consumption grew 1.83% in September to 114.49 billion units (BU), indicating a slow recovery. The industrial sector accounted for 42% of the total electricity consumption in FY19P.India saw a consumption of 1,252.61 BU (billion units) or 1,230 TWh (terawatt hours) in FY20 while seeing growth in both consumption and production of power every year. Industrial consumption amounted to 41% of total consumption of power in FY17-18.
Opportunities in the power sector:
- Demand for electricity is expected to increase – per capita consumption of electricity is estimated to be at 1894.70 TWh by FY22.
- Per capita electricity consumption in the country grew at a CAGR of 2.96% from FY16 to FY20, reaching 1,208 KWh in FY20. This growth was mainly attributed to electrification of villages and households across the country.
- Demand is currently higher than supply by about 7.5%, giving room for scaling up production capacities.
- The government is taking up multiple reforms which are aimed to improve the entire power sector over the long term.
- The government is not only taking initiatives to increase overall renewable capacity but also its share in the overall power capacity in India.
- In order to decarbonize the energy consumption, India needs a 30- fold increase in renewable energy, 30-fold increase in nuclear energy and doubling of thermal energy, which would make 70% of energy consumed carbon free.
When looking at Power companies, an investor should keep the following factors in mind:
- Investors need to assess the debt levels of the companies, especially for discoms. This is because discoms have to first pay to buy power, either by entering a PPA (power purchase agreement) or buying it from the power exchange, and then get paid for power used by consumers. The period between paying and receiving money has to be supported using debt, therefore, discoms usually run high levels of debt.
- Assess the capacity of production and the PLF (power load factor) at which these companies generate electricity. PLF is the ratio of power generated/max capacity, a higher PLF ratio can be indicative of future capex the company may take up, since setting up capacities is highly capital intensive. This could be indicative of the way cash flows are utilized.
- Investors should assess the operating cash flows generated by a company which provide a more consistent idea vs the net profit as these companies are subject to large non-cash items such as depreciation which can affect profits.
- Assess the realisation per unit figure for the power companies to identify per unit efficiency in generating revenues. Higher the number, better it is for the revenues of the company.
Portfolio Companies of Energy StocksReliance Industries is India’s largest company. The company is primarily engaged in the business of oil exploration, refining of petroleum and marketing & distribution of the same along with operations in petrochemicals. Reliance has diversified further by foraying into the retail, telecom and technology space with Reliance Retail and Reliance Jio, respectively. With all the businesses combined, the company pulled in revenues of about ₹7.92 lakh crores. The majority of the company's cash flows come from the oil sector, but it has been aggressive in diversifying into companies that may help it achieve rapid growth and utilize its size in the proper sequence while mitigating the risks associated with the oil business. The company has plans to achieve carbon neutrality by 2035 thereby focusing on diversifying across energy and other industries while continuing to invest in the oil business.It has also successfully become net debt free which is positive as peers are usually more debt laden at the given scale. The company currently has an EV/EBITDA of 14.9x and a P/E ratio of 27.8x which values the company fairly given the efficiency in oil business vs peers. The company currently has an EV/EBITDA of 16.04x and a P/E ratio of 27x which values the company fairly given the efficiency in oil business vs peers. The stock is expected to offer diverse growth opportunities over the long term. Along with this, the company has Reliance Jio and Reliance Retail among other digital investments which have been effectively contributing to the margins and growth of the company. The Oil & Gas segment is poised to be a source of significant value and sustained earnings growth in the coming years for the company. Going ahead, the retail segment is positioned for strong growth as the firm has been bolstering its portfolio through acquisitions. Moreover, Reliance’s foray into FMCG is expected to borne fruits in the future. Diversifying and gaining a leadership position in digital services and foray into the organized retail sector with grocery retailer Jio Mart have reduced the overall inherent cyclicality risks due to its O2C and petrochemical business. Additionally, the company is at the cusp of new Investment cycle with the announcement of new Capex plans worth USD 80 bn across green energy space. It does face extreme competitive pressure in almost all verticals and there are other regulatory risks associated with the telecom segment. Any major debt funded capital expenditure can deteriorate its financial risk profile which could be a negative factor.
ONGCOil & Natural Gas Corporation is the country’s largest oil exploration and production company. The company currently has operations across the world and is also engaged in some downstream activities of crude oil processing. It produced 21.70 MMT of oil and 21.68 BCM of natural gas in FY22 and is vertically integrated with HPCL for downstream activities such as Refining and Marketing.On financials, the company has delivered an ROE of 19.6% for FY22 With the rise in oil prices witnessed in FY22, the company did see some gains pour in its favor. ONGC reported higher crude oil realization of USD 76.6/bbl even as volume growth remained sluggish.. The company maintains relatively low debt levels with the debt equity ratio at 0.5x. The stock currently trades at a P/E of 3.51x and an EV/EBITDA of 3.46x indicating the company is cheaply valued. But at the same time, ONGC faces high amounts of risk from changing crude oil prices as volatility directly affects the profits of the company. Another factor to consider is the changes in regulations that can affect realisations. An investor must also consider its hedging gains and losses which will affect the bottomline in a big way.
Petronet LNGPetronet LNG is primarily engaged in the business to develop, design, construct, own and operate Liquefied Natural Gas (LNG) import and regasification terminals in India. The company is jointly run by BPCL, GAIL, IOCL, and ONGC. It has set up the country's first LNG receiving and regasification terminal at Dahej, Gujarat with present nominal capacity of 17.5 MMTPA and another terminal at Kochi, Kerala having a nominal capacity of 5 MMTPA.The company is also exploring suitable opportunities within and outside India to expand its business presence. It has reported highest ever PBT and PAT during FY 2021-22. PBT stood at Rs 4,474 crore and PAT was Rs 3,352 crore in the same period. For the next 5 years, Petronet LNG announced its plans to incur capex to the tune of Rs. 15,000 crore to add 2 tanks at Dahej facility and other capacity expansion at both Dahj and Kochi along with introduction of 1,000 LNG gas stations, biogas projects and terminal construction.The company has delivered a ROE of 26.7% which is higher than peers while the operating profit margin stood at 9.51%. Additionally, it reduced its debt-to-equity ratio to 0.24x which indicates a lower-than-peer debt level. The company currently trades with a P/E of 9.75x and EV/EBITDA of 5.22x indicating that the stock trades at very attractive valuations.
Model Portfolio of Best StocksIn order to get an exposure to best Energy stocks, you need a total of Rs 35,051 for the below curated portfolio as of December 28, 2022.
|FINAL PORTFOLIO||WEIGHTAGE (%)||CMP Dec '2022 (₹)||NO OF STOCKS||TOTAL (₹)|
A Detailed Table with Various Parameters of Energy StocksThe below table covers some of the most important factors while evaluating energy stocks such as return ratios including RoE and RoCE, operating margins, sales and earning growth and market cap among others.
|Sr.No.||Name||NSE Code||BSE Code||INDUSTRY||RATING||CMP Dec'2022||Mar Cap Rs.Cr.||Net worth Rs.Cr.||P/E||OPM %||ROE %||ROCE %||Revenue Growth (5 years)||Profit Growth (5 years)||Debt / Eq||CMP / BV||CMP / Sales|
|1||Reliance Industries||RELIANCE||500325||OIL & GAS (REFINING)||2||2,544||1,721,435||790,048||26.8||15.5||8.16||9.42||18.1||14.4||0.4||2.16||2.05|
|2||ONGC||ONGC||500312||OIL & GAS (EXPLORATION)||3||144||181,030||278,911||4.7||11.9||19.5||16.8||11.7||14.3||0.54||0.65||0.28|
|3||Oil India||OIL||533106||OIL & GAS (REFINING)||1||209||22,707||37,174||2.78||34.6||20.4||21.6||22||18.2||0.48||0.61||0.59|
|4||IOCL||IOC||530965||OIL & GAS (REFINING)||0.5||74.8||105,698||127,343||8.33||4.37||20.4||15.6||10.6||4.72||1.26||0.83||0.14|
|5||BPCL||BPCL||500547||OIL & GAS (REFINING)||0.5||324||70,327||46,767||1.53||20.4||15.6||11.5||4.28||1.73||1.52||0.16|
|6||HPCL||HINDPETRO||500104||OIL & GAS (REFINING)||0.5||230||32,676||28,078||-2.45||18.1||11.6||13.3||-2.65||2.65||1.16||0.08|
|7||MRPL||MRPL||500109||OIL & GAS (REFINING)||0.5||55.2||9,683||8,116||2.12||7.22||52.2||13.9||10||2.85||2.27||1.21||0.09|
|8||Adani Total Gas||ATGL||542066||GAS DISTRIBUTION||3||3,607||396,723||2,679||819||19.2||23||24.6||22.8||28.9||0.45||148||97.9|
|9||GAIL (India)||GAIL||532155||GAS DISTRIBUTION||3||95.8||63,022||65,803||5.33||11.8||20.9||23.3||13.8||30.5||0.22||0.95||0.48|
|10||Indraprastha Gas||IGL||532514||GAS DISTRIBUTION||4||410||28,718||7,389||19.1||18.6||19.8||26.5||15.1||17.2||0.01||3.88||2.53|
|11||Petronet LNG||PETRONET||532522||GAS DISTRIBUTION||3||212||31,770||14,194||9.49||9.51||26.8||29.8||11.9||14.5||0.24||2.27||0.59|
|13||Mahanagar Gas||MGL||539957||GAS DISTRIBUTION||3||842||8,321||3,796||15.4||16.7||17.5||23.2||11.8||8.7||0.03||2.17||1.61|
|14||Vedanta||VEDL||500295||METALS & OIL||0.5||305||113,337||54,239||7.03||28.4||30||32.2||12.9||28.8||1.09||2.07||0.77|
|15||Coal India||COALINDIA||533278||METALS & MINING||3||223||137,614||56,363||5.18||28||43.6||54.3||7.02||13.4||0.07||2.41||1.08|
|17||Power Grid Corpn||POWERGRID||532898||POWER TRANSMISSION||0.5||216||150,321||82,208||10.2||84.2||19.3||11.5||10.1||13.6||1.59||1.82||3.49|
|19||Tata Power Co.||TATAPOWER||500400||POWER TRANSMISSION||0.5||208||66,511||25,682||26.2||12.3||8.42||9.3||9.19||8.78||2.07||2.59||1.28|
|20||Torrent Power||TORNTPOWER||532779||POWER TRANSMISSION||0.5||495||23,810||10,929||11.7||20||8.64||13.1||7.44||17.3||0.96||2.17||1.15|
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