Best Energy Stocks to buy in India: Factors to consider while buying

About Energy Stocks in India 

Energy sector is the most vital industry in developing, developed and advanced economies in today’s world. The energy sector is a clubbed term for large-scale units including the coal and mining industry, the power and distribution sector, the oil and gas industry, and the power generation sector.

Energy Sector Stocks in India: Which Industries constitute?

Whenever we speak of top energy stocks in India or energy shares in India, it is essential we bring within its fold the crude oil sector and related products that assist in extraction, derivation, processing, and distribution of it.

Within this definition, oil drilling facilities and plants also constitute the energy stocks in India. Similarly, industries powered by crude oil that generate electricity, or fuel cars, or create plastic, asphalt, lubricants, and paints, all comprise the energy company stocks in India. 

So, as an interested investor if you want to expand and earn your profits from the energy sector then you will automatically have to look into all of these related sectors for finding the most suited energy shares in India. Additionally, the best oil company shares to buy in India in the crude oil sector include diesel, petrol, kerosene, heating oil, LPG, ATF (Aviation Turbine Fuel), CNG, and various others that fulfill the energy needs of a country (in this case India).

Summary in brief

• About the Energy Sector 
• Which industries constitute the energy sector stocks in India?
• Segmentation of energy sector stocks in India
• Factors to check while selecting energy sector stocks in India
• Different energy sector stocks in India
• Potential for investors in the power generation sector stocks
• FAQs

Different Energy Sector Stocks in India

India is the second-largest producer as well as consumer of power globally, having an installed capacity of 388.13 GW (gigawatts). In the renewable energy sector, India ranks fourth in wind power and fifth in terms of solar power capacity. 

The country has a renewable power capacity of 100.68 GW with a projected rise of 227GW by the end of 2022. The number is predicted to further double with electricity capacity peaking at 40 percent by the year 2030.

India’s total installed capacity of renewable energy stands at 100.68 GW, hydro energy at 46.41 GW, and nuclear energy at 6.78 GW. The overall power sector derives energy from four channels in India that are discussed below:

Thermal

Thermal segment delivers 60.36 percent of total power capacity that is drawn from Coal, Gas, Lignite, and Diesel based power plants. As of 2021, Coal is the largest among the installed capacity peaking at 202.20 GW. Diesel has the smallest installed capacity of 0.51 GW and Gas & Lignite plants have 31.54 GW. The total thermal power capacity of India equals 234.72 GW.

Renewables

The renewable segment comprises 25.94 percent of total installed power capacity as of the 2021 year-end, with Solar power being the largest power generator at 41.08 GW, closely followed by wind power at 39.44 GW.

Hydro

The Hydro power segment in 2021 contributes 11.96 percent to the total power capacity with an estimated power generation capacity of 46.41 GW.

Nuclear

This is the smallest energy segment, contributing to 1.75 % of all installed capacity in India at 6.78 GW as of 2021.

Energy Sector Stocks: Segmentation

The energy stocks in India are categorized into three broad divisions as discussed below:

Upstream segment 

Upstream segment of top energy stocks in India are those that are engaged in E&P or Exploration and Production of crude oil. Seasoned investors can browse the upstream segment if they are looking to buy energy shares in India. The companies in this category usually have the best energy stocks to buy in India owing to their strong brand equity, consistent valuation ratio, high investment capital, and technological intensiveness. Oil and Natural Gas Corporation (ONGC) is an example of the E & P industry.

Midstream segment

Midstream segment consists of top energy sector stocks in India as they are mostly engaged in storage and transportation industries that are in large numbers in the country. Companies in the midstream segment are involved in trucking, pipeline, shipping, and storage of raw materials, which is why they have one of the most known energy shares in India. Bharat Oil & Waste Management Limited is an example of the midstream segment.

Downstream segment

Downstream segment has energy sector stocks that are engaged in producing, processing, refining, and marketing of crude oil. Indian Oil Corporation Limited (IOCL) is an example of the downstream segment.

Factors to Check While Selecting Energy Sector Stocks in India

Price Volatility

The trending prices of oil and its volatility are continuously fluctuating in the global market as they are driven by numerous features including geopolitical conflicts, resource availability, foreign policy, etc. 

Therefore, when deciding to buy energy shares in India, as an investor you must look at WTI and Brent crude, which are the two primary crude prices in the world. Oil companies mostly have hedges in place so they should be assessed thoroughly in terms of gains and losses from the contracts. As India uses the Brent crude prices for pricing the oil and gas energy sector, it should be given more precedence if buying shares from the Indian stock exchanges.

Segment Identification

Before looking for the best oil company shares to buy in India, investors must necessarily identify the segment, whether it is upstream, midstream, or in the downstream segmentation, they want to invest in. 

This process of segment identification is quite crucial to buy the best energy sector stocks because the upstream segment usually derives its profits from higher crude oil prices globally but in the Indian context, it derives from higher Brent prices. In other segments, huge profits can be made when there is a striking difference between the prices of crude oil and the pricing of finished products like diesel, ATF, petrol, etc.

When the price difference is too low, the operating margins mostly swing between 5 to 15 percent and the companies are able to generate hefty cash flows. With regards to downstream oil companies, they tend to be less volatile to costs and revenues and they can comfortably adjust to changing oil prices unlike upstream and midstream, both of which are directly affected by volatility in global oil prices.

Company Reserves

The investor should actively assess the company reserves as it will give them an idea about the requirements for further capital expenditure towards oil processing and oil drilling facilities. 

The investor should also assess the refining quantities and proven reserves that are held by the company over the given time period of their buying. In the case of midstream oil companies, investors can assess their gas pipeline network and for downstream segments, they can assess the company’s refinery production.

Company Finances

It is extremely important for every investor to research and evaluate the financial front of companies to look out for the amount of debt the oil company owes, debt/equity ratio, earnings to cover debt obligations, interest coverage ratio, and other associated overhead costs. Especially the E&P companies having debt obligations suffer directly as a result of the volatility in crude oil prices.

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Best Energy Sector Stocks: What do they hold for investors?

An investor looking to invest in shares in the power generation sector in India should know the following areas of potential to decide where they want to fuel their investments:

• As the electrification of the remotest villages is being taken up in large scale, the demand for electricity is estimated to rise massively with per capita consumption of 1894.70 TWh by FY22.
• The demand for power generation has currently exceeded its supply by about 7.5 percent thus leaving enough room for upscaling the production. This has led to the government announcing multiple projects and reforms for improving the power sector over the long term.
• As the power grid continues to grow, the government is taking various initiatives to increase India’s renewable energy capacity.
• For decarbonizing its energy consumption, the country needs a 30-fold surge in its renewable energy, another 30-fold increase in its nuclear energy, and almost double of thermal energy. These numbers will then add up to making 70 percent of the energy consumed carbon-free.

List of Energy Companies You Can Invest in 2022

Find out the best energy stocks to buy in India for long-term investment from the table below:

(Data as of November 25, 2022)

Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns

Key Takeaways

• Energy stocks in India include the crude oil sector and related industries involved in extraction, derivation, processing, and distribution.
• Investor looking to reap profits from energy sector stocks in India can expand their investments in multiple companies that sell diesel, petrol, kerosene, heating oil, LPG, ATF (Aviation Turbine Fuel), CNG, and various others.
• India’s energy sector demand is expected to double at 1,123 Mtoe (million tonnes of oil equivalent) by the year 2040, so investors in the energy sector stocks in India have a lot to look forward to.
• While selecting energy sector stocks in India, investors must be careful about checking price volatility, company segmentation, company reserves, cash flow, and finances.
• India’s total installed capacity of renewable energy is 100.68 GW, hydro energy at 46.41 GW and nuclear energy is 6.78 GW.
• India’s power sector derives energy from four channels namely thermal, renewable, hydro, and nuclear.
• As the electrification of the remotest villages is being taken up on a large scale, the demand for power generation has currently exceeded its supply by about 7.5 percent, bearing great news for investors in India’s energy and power sectors.

Important things to remember:

1. Do Not Blindly Follow Hot Tips

No matter how credible the source is, never follow a stock marketing tip blindly without conducting thorough research personally. Always select the stocks after doing proper research and analysis on the performance as well as the companies. While some tips can work out to give you huge benefits, the wrong ones can push you down under the risk pretty quickly. 

2. Eliminate Loser Stocks from Portfolio 

There is absolutely no guarantee that a stock will rise after a great fall. Know that it is extremely important to be practical about what is possible and what's impossible in the stock market. So, upon realizing that a stock is performing poorly in your portfolio, accept your mistake and sell it immediately to prevent further losses. 

3. Don't Exceed Your Investment Budget Abruptly 

While it's true that long-term investments are way better than other forms of investment, you shouldn't exceed your investment budget in a haste. Instead, decide on a fixed amount and invest it across various good stocks. Rather than investing in only one stock, divide your budget evenly across multiple good-performing stocks and shares. Disclaimer: The securities quoted are exemplary and not recommendatory. Past performance is not indicative of future returns