Proactive Power Sector Reforms To Have Transformative Impact: Nitya Mishra, Fund Manager, ICICI Prudential Mutual Fund

As the world's fourth-largest consumer, India's energy demand is experiencing strong growth, driven by multiple factors. The country's fast-growing economy, rapid urbanisation, and industrialisation are creating a significant need for energy across various sectors. As incomes shoot up and lifestyles transform, we are witnessing a surge in demand for energy-intensive appliances, vehicles, and other modern conveniences. India’s per capita energy consumption is 1/3rd of the global average. China’s consumption is 4.4x of India and Korea is 9.5x of India. With India expected to become the third-largest economy in the world, its per capita energy consumption will witness a significant rise.

Additionally, government initiatives towards infrastructure development, rural electrification, and promotion of clean energy are further giving energy consumption a leg-up. This continued growth in demand positions the energy sector as a compelling investment opportunity. We believe that there is potential for significant upside as companies cater to the expanding energy needs of the nation.

The government's proactive reforms in the power sector are poised to have a transformative impact on the profitability and growth prospects of power generation and distribution companies. Measures such as the late payment surcharge rules and the revamped distribution sector scheme are enhancing the financial stability and operational efficiency of these companies. The emphasis on domestic coal production is reducing costs and ensuring a reliable energy source. Additionally, reforms promoting competition and efficiency in transmission and distribution, including the introduction of general network access and DISCOM privatisation, are expected to foster a more dynamic and profitable landscape for companies operating in these segments.

We believe current valuations in the energy sector are relatively reasonable. For instance, the Nifty Energy index currently trades at a Price-to-earnings (P/E) discount of 38 per cent to the broader Nifty 50 Index. This is even after the energy sector has outperformed the broader market recently. The Price-to-book (P/B) discount is even more significant. The growth trajectory for energy-related investments in India is undeniably strong. The robust energy demand, coupled with supportive government policies and rapid technological advancements, is expected to provide alpha-generating opportunities in the sector over the coming decade.

Our investment philosophy within the energy sector is rooted in a long-term perspective, focusing on companies that demonstrate strong growth potential and resilience. We shall adopt a diversified approach, strategically allocating investments across the entire energy value chain; core investments across established players in conventional energy sources like oil, gas, and thermal power, providing stability and consistent cash flows and satellite investments in emerging areas such as renewable energy, energy efficiency technologies, and ancillary services, with an endeavour to capture the high-growth potential of these segments. We prioritise companies with robust fundamentals, healthy balance sheets, and a commitment to sustainable practices, aiming for a balanced portfolio.

We are acutely aware of the inherent risks of investing in the energy sector. To mitigate these risks and safeguard investors' capital, we aim to employ a multi-faceted approach. Diversification across the energy value chain shall ensure that the portfolio is not overly reliant on any single company or sub-sector.

We aim to select companies with strong fundamentals, robust balance sheets, and proven management teams, as these are better equipped to weather market fluctuations. Moreover, our long-term investment perspective allows us to navigate short-term volatility and focus on the sustained growth potential of the sector.

The ICICI Prudential Energy Opportunities Fund distinguishes itself from other energy-focused funds through a comprehensive and forward-looking approach. We aim to offer investors a unique advantage by investing across the entire energy value chain, encompassing both conventional and renewable energy sources. This diversified exposure shall allow investors to participate in the multifaceted growth story of the Indian energy sector.

Our experienced team of investment professionals possesses a deep understanding of the Indian energy landscape, enabling us to identify and capitalise on promising investment opportunities. We have been investors in these companies for a long time now and have developed domain expertise across sectors. We believe this would help us in creating a well-balanced and robust portfolio for the theme. We are committed to sustainability and prioritise investments in companies that embrace environmentally responsible practices.