Much ahead of global peers, Indian energy stocks to scale new peaks

Top 10 performers are companies from India

MUMBAI: Buoyed by rising demand and the anticipation of higher dividends, investors are expected to show strong interest in shares of Indian oil and gas companies.

The Nifty Energy Index, a key benchmark for the sector, has surged 31 per cent this year, positioning it for a nine-year winning streak.

In comparison, a Bloomberg index tracking 124 mid to large-sized global energy firms has gained 4.7 per cent, with half of its top 10 performers being traditional energy companies from India.

State-owned companies

India’s energy sector, largely dominated by state-owned enterprises, has been a favorite among investors due to the country’s rapidly increasing energy consumption.

India is projected to be the primary driver of global energy demand through 2030. Investor optimism is further bolstered by policy incentives aimed at boosting domestic oil and gas production, along with increased cash payouts to shareholders.

“In an environment where earnings growth visibility is highly valued and dividends are scarce, Indian energy companies stand out with their attractive dividend yields,” said a portfolio manager at an investment firm.

“We maintain broad exposure to this sector and are open to increasing our allocation to these companies,” he added.

Top performer

Oil India Ltd., a major producer, has been the top-performing stock in the industry this year, with a 184 per cent gain.

The company, along with Oil & Natural Gas Corp., is expected to see further earnings growth after India announced earlier this month that natural gas produced from new wells would enjoy a 20 per cent price premium.

Refiners are also expected to benefit from improved margins over the next two quarters, while ongoing projects to expand industry capacity are likely to yield long-term rewards.

“A combination of higher gross refining margins, stable crude prices, and steady fuel prices suggests that oil marketing companies’ integrated margins should improve significantly over the second and third quarters,” said a leading industry analyst.

Higher dividend

The sector’s higher dividends are another major draw for investors. The Nifty Energy Index’s projected 12-month dividend yield is 2.1 per cent, compared to 1.2 per cent for the benchmark Nifty 50, according to data compiled by Bloomberg.

However, India’s heavy reliance on crude oil and natural gas imports makes its refiners vulnerable to global price fluctuations.

Additionally, the country’s efforts to accelerate the transition to clean energy could pose challenges for traditional energy firms.

Foreign investors

Despite these concerns, foreign investors—who had cooled on India’s buoyant stock market earlier this year—returned as net buyers of local energy firms in July after five consecutive months of selling, according to data from the National Securities Depository Ltd.

“We expect these companies to outperform both global peers and underlying commodities due to hardware upgrades, free cash flow, and higher-quality returns,” said an analyst at an international investment bank. “The early stages of re-rating were driven by pricing power, and the next phase should be propelled by improved return quality and potential dividend surprises,” he added.