Energise Your Investment Portfolio In 2025 With Energy Stocks

By Sanjay Chawla

As India marches towards Viksit Bharat, one critical enabler has been the transformation in our energy landscape.

In 2003, India’s per capita power consumption was 0.57 megawatt hour (MWh). By 2023, it had reached approximately 1.4 MWh – a 245 per cent growth in two decades. This roughly coincided with the growth of India’s per capita gross domestic product (GDP) from about $543 in 2003 to about $2,500 in 2023.

As economies develop and per capita GDP increases, power consumption also rises. This is true not only for developed nations, such as the US, Japan, or Germany, but also of countries like China and South Korea. For instance, China witnessed a 3.5 times surge in its electricity consumption as its per capita GDP grew from $1,800 in 2005 to $12,600 in 2023. South Korea’s electricity consumption grew in tandem with its per capita growth, almost three times historically.

The reason for this causal link between incomes and energy consumption is pretty simple; energy underwrites the basis for all economic activity, as it’s required for homes, commercial complexes, as well as industries.

As people’s incomes rise, they tend to buy more products and services and consume more, all of which drives demand across homes, commercial, and industrial purposes. Energy generation and consumption are, therefore, not just an indicator of economic growth, but also powers this growth.

The projections for India’s demand over the next 5-6 years bear this out. India’s GDP is currently at $3.9 trillion and is expected to grow to about $6.3 trillion by FY29-30. The country’s energy demand over this period is expected to keep pace with the economy’s development, growing by 1.7x to about 2,281 billion units. (Source: IMF, Jefferies And Internal Research; Data as on October 31, 2024 (latest available data).

Government Initiatives

In the last 10 years, the government has undertaken several landmark reforms in the energy sector. These include remunerative pricing for exploration and production, gas pricing reforms, windfall taxes, strategic capital allocation, support for oil marketing companies (OMCs), stable oil and refining margins, a unified gas transportation tariff, and increased investment in gas infrastructure. All of these steps have contributed to making energy an attractive sector for investors.

The changing landscape in India’s energy sector is creating a multi-decade business opportunity for players in the energy value chain. Huge investments are underway to double the installed capacity from the present 448 giga watts (GW) to 900 GW by 2031-32 within which the overall share of renewable energy is set to expand from 42 per cent to about 66 per cent. In the push towards a green transition, solar capacity is set to grow 4X from 87 GW in 2024 to 365 GW in 2031 -32.

Similarly, installed capacity for wind energy is set to grow two-and-a-half times from 47 GW to 122 GW. (Source: Government of India - Press Information Bureau, Ministry of New and Renewable Energy – PLI, Center on Global Energy Policy - Columbia University, NEP – National Electricity Plan, Inevitable Policy Response; Data as on August 5, 2024 (latest available data).

The Centre has also rolled out a number of sops. These include:

• Production-linked incentives (PLI) scheme worth $2.85 billion to encourage the manufacturing of high-efficiency solar PV modules

• PLIs on advanced chemistry cell battery storage and viability gap funding up to $460 million for battery energy storage systems with a capacity of 4 GW hours.

• PLIs and other incentives for electrolyser manufacturing and green hydrogen production, hoping these will attract investments worth $100 billion.

These megatrends and government incentives offer excellent investment opportunities for a wide range of companies engaged in oil, gas, and coal extraction, generation, transmission, marketing, distribution, equipment and technology suppliers, and service providers.

These huge business opportunities across different sub-sectors in the energy value chain has created a profusion of choice for investors looking to participate in this evolving structural growth story.

Today, there is a broad universe of stocks in the energy space with almost a third of the Nifty 500 stocks connected to the energy value chain across a total of 19 varied sub-sectors.

What’s more, these energy-themed stocks have delivered better returns than the Nifty 500 TRI in the last one, three, five, seven, and 10 years.

Research by Baroda BNP Paribas Mutual Fund shows that despite this consistent outperformance, the Nifty Energy TRI trades at much lower price-to-book (P-B) and price-to- earnings (P-E) ratios as compared to the average Nifty 500 TRI stock. This shows that these stocks offer relatively better value and higher margin of safety for investment, particularly when one considers that the Nifty Energy TRI stocks have much higher one-year earnings per share (EPS) growth over their Nifty 500 average counterpart.

The year 2025 may be the time to energise your investment portfolio with the electrifying investment opportunities of this sector.

The author is chief investment officer – equity, Baroda BNP Paribas Asset Management India Private Limited

(Disclaimer: Views expressed are the author’s own, and Outlook Money does not necessarily subscribe to them. Outlook Money shall not be responsible for any damage caused to any person/organisation directly or indirectly.)