Thursday, 21 February 2013

Sector Snapshot - Energy Sector

Energy is a day-to-day requirement. The ever-increasing demand of petroleum and hydrocarbon products is a part of our life. India is an energy-deficient country. 75% of crude oil requirements is catered through imports. The rest is through State run and private oil exploration and production companies catering to the energy needs of the nation.

The Govt. revises its National Exploration Licencing Policy (NELP) to encourage more domestic exploration and production. However, because this industry is highly regulated and highly subsidised at present the growth of the industry is very slow with no major improvements happening till now.

The price of petroleum products is largely affected by crude prices in the international markets. Due to this the high import percentage is a major contributor to the Current Account Deficit (CAD). Adding to this, the products are highly subsidised in the domestic market leading to huge fiscal deficit year after year. This sort of situation is gradually becoming unsustainable.

Having realised this, the Govt. is gradually moving towards achieve true sale price at the point of sale and thus reducing the burden of subsidy. As we move towards a fully decontrolled and market linked pricing structure, it will only help the industry. The developments will increase competition with more companies participating in retail sale. This will re-rate the valuation of existing companies in the sector.

Investment Logic :

Better price realisation at source will give more cash flow in hand to the companies to expand their exploration and production activities and leading to better energy security for the country.

The sector at present is an under owned sector due to the policy hurdles affecting the sector. However, in the future, the energy sector will be a growth sector and it is prudent to keep a percentage of the sector in the portfolio. However, since the improvements will depend on effect of policy changes which will only take place gradually, any investment in this sector should be for the long term duration to get good returns.