Expectations of increased dividend payouts and strong local demand may be the foundation of an ongoing bull run in India’s oil and gas businesses.
With a 31% increase this year, the Nifty Energy Index—a local sector benchmark—is headed for a nine-year winning run. Half of the top 10 performances on the Bloomberg gauge, which tracks 124 mid-to-large-sized energy companies worldwide, are conventional energy companies based in India. The gauge has increased 4.7% throughout the time.
India’s rapidly increasing energy consumption has made the industry, which is controlled by state-owned enterprises in the country, a darling of investors. According to projections, India will be the primary driver of world demand through 2030. Along with higher cash payments to owners, legislative incentives to increase domestic oil and gas production are another source of hope.
“In a market where earnings growth visibility is highly valued, and dividends are scarce, Indian energy companies stand out by offering attractive dividend yields,” said Vikas Pershad, portfolio manager at M&G Investments. “We maintain broad exposure to this sector and remain open to increasing our allocation to these companies.”
With an 184% increase, major producer Oil India Ltd. is the best-performing stock in the industry this year. According to JM Financial, India’s announcement earlier this month that natural gas produced from new wells will enjoy a 20% pricing premium gives the company, along with Oil & Natural Gas Corp., additional earnings upside.
Improved margins are anticipated for refiners over the next two quarters, and a current building frenzy to boost sector capacity is expected to pay off in the long run.
“A combination of higher gross refining margins, range-bound crude, and stable fuel prices implies that the oil marketing companies’ integrated margins should improve sharply over 2Q-3Q,” Saurabh Handa, an analyst at Citigroup Inc., wrote in a recent note.
The industry’s increased profits are still another draw. According to data gathered by Bloomberg, the predicted 12-month dividend yield for the Nifty Energy Index is 2.1%, while the benchmark Nifty 50’s yield is 1.2%.
Indeed, refiners in India are subject to fluctuations in world prices due to their significant reliance on imported natural gas and crude oil. Furthermore, existing energy companies face negative consequences from the nation’s efforts to expedite the transition to sustainable energy.
However, after five months of selling, international investors—who had become less interested in India’s frothy stock market this year—came back as net purchasers of regional energy companies in July, according to data from National Securities Depository Ltd.
“We expect outperformance against both global peers and underlying commodities owing to hardware upgrades, free cash flow and higher-quality returns,” said Mayank Maheshwari, analyst at Morgan Stanley. “Early stages of re-rating were triggered by pricing power. The next stage should be driven by improved return quality and dividend surprises.”
