Energy Sector Stares at Its Jio Moment: 3 Stocks to Watch Out For 

Almost five years ago, the Indian telecom sector witnessed tectonic shifts.

Reliance Jio, a disruptor with deep pockets, entered the industry in 2016-2017, causing a huge value migration from low speed to high speed data. While this evolution was inevitable, with aggressive pricing, the entry of Jio accelerated it, reducing the transition from a typical 10 long period to just 2 to 3 years. The transition was also helped by the ecosystem- penetration of smartphones and digital content. In fact, it would not be wrong to say that both the trends fed on each other in a symbiotic and growing relationship.

The result? Even as the industry grew, the incumbents and legacy telecom players were adversely impacted. From over 10 players, the industry shrunk to three - Jio, Bharti, and Vodafone.

Another sector is witnessing its Jio moment now.

It's none other than Indian Energy sector.

The industry is aspiring to change colour from brown, grey and black to green, moving from conventional sources to green and clean energy.

From 2-wheeler electric vehicles to e-auto rickshaws, e - buses, solar lighting in institutional and in case some private compounds, companies minting millions on carbon credits trading, the transition is quite tangible, and no more limited to government policy statements and targets.

India to Become a Green Hydrogen Hub

The latest developments on the policy front include laying the roadmap for hydrogen production till 2030 under National Green Hydrogen mission. It suggests supplying green hydrogen and ammonia at the lowest prices in the world. It also shares the ambition to be the key exporter of the commodity.

In fact, EU members, Japan and South Korea have expressed interest in sourcing green hydrogen and green ammonia supplies from India. With an outlay of Rs 175 bn, incentives, including PLI schemes, are to be rolled out for producing electrolysers within India.

Electrolysers are used to separate hydrogen and oxygen molecules in water, to produce hydrogen. By 2025-26, as these electrolysing capacities come up, huge import duties are proposed for imported electrolysers that is the norm now. The initial target is to produce 15 GW, and is expected to go 4 times more, thus making India the largest manufacturing hub in the world.

In short, the policy, ecosystem and investors with deep pockets have come in together to bring about once in a century disruption in the sector.

While the policies are focused on making India energy independent, with ESG gaining favour, huge investments are flowing in green energy theme. As per Bank of America, India is expected to attract $10 bn, or Rs 600 bn investment in FDI in this year alone, in areas like EV and Green Hydrogen.

The theme has found patrons like Mr Ambani, Mr Adani, and Tata Group.

Mr Ambani has unveiled plans to invest US$ 75 bn in clean energy products over one and a half decade. In 20 years, his target for green energy export from India is US$500 bn.

Mr Adani's vision is to become the world's largest solar power company by 2025 and largest renewable power company by 2030.

Tata group too is eyeing five - fold increase in green energy capacity by the end of the decade.

L&T has announced plans to invest up to $2.5 billion in the next 3-4 years to start with, across green hydrogen, solar and wind projects.

And then there is a bunch of companies such as Oil India, NTPC, GAIL, ONGC that have rushed to join the clean energy theme.

These ambitions that will require huge investments, perhaps requiring a lot of borrowed capital, and only time will tell whether the returns on this investment will be viable. History has enough examples that huge expansion in sunrise sectors have not paid off too well.

So while I'm excited about this theme, it is not the big companies that make headline, with huge capex plans that I'm keen on.

I'm more focused on stocks which are likely to ride clean energy and green energy drive, without the downsides that these big names may have. These are some lesser-known plays that could benefit in any case and deserve to be on your watchlist.

So, moving on to the stocks that I feel should be on your watchlist:

The first is Bharat Electronics Ltd is a well-known defence electronics player that also has JV business that caters to medical electronics industry. The mix of defence: non-defence stands at 80:20.

So, what's a defence stock doing in the clean energy stock watchlist.

Well, that's because Bharat Electronics has signed an MOU or memorandum of understanding with US-based Triton Electric Vehicle to manufacture Hydrogen fuel cells. This will involve a technology transfer from the latter to meet the requirements of the Indian market. The MOU also focuses on applications such as e mobility.

In fact, Bharat Electronics will be supplying lithium-ion battery packs to Triton EV in next 2 years for its semi-truck project in India worth Rs 81 bn.

Bharat Electronics is a PSU, but don't let that tag put you off. Bharat Electronics is unlike its other PSU peers that reek of poor management and execution.

Its FY22 return on equity and return on capital employed stand at 21% and 27% respectively. And the long-term return ratios too have been in healthy double digits.

The business is debt free. The 5-year average dividend pay-out is 41%. In the last six years, the operating profit has grown at a CAGR of 13% from FY17 to FY22. And operating profit margins have been above 20%. The cash flow from operations have far exceeded the net profits which is a good sign.

The stock is trading at a PE of 27 times.

The second is Eki Energy, with a brand name - Enking International.

EKI Energy works in the realm of "climate change, carbon credit, and sustainability solutions" across the globe.

Unlike the big names that are investing billions and are likely to be under huge debt to unleash the green revolution, Eki Energy is net debt free. It's engaged in carbon credit trading at a global level, with Europe and America accounting for 83%.

A carbon credit is a tradable certificate, which allows its holder, a right to emit, over a certain period, carbon dioxide or other greenhouse gases. One carbon credit is equal to one ton of carbon dioxide.

The concept behind carbon credits is that as the price of credits rises, it puts increasing pressure on entities to make permanent reductions inhouse, so there is no longer a need to purchase them outside.

Coming to the business of EKI Energy...

It offers carbon sustainability advisory services to a wide range of projects such as bio methanation, renewable power, waste management, energy efficiency and water purification. along with advisory services for the eligible carbon credits.

The company identifies buyers and suitable sellers of credits across countries. The company has migrated to BSE main board from SME board in 2022.

Its clients include Siemens, Shell Singapore, IMF, Adani, Zomato, Aditya Birla Group and so on, along with PSU clients such as ONGC, NTPC, HPCL, IOCL, etc.

With 137 countries across the world committing to net zero emissions by 2050, the opportunity size is huge. The demand for carbon credits is expected to increase by 15 times by the end of 2030. The company has more than thousand carbon credit projects in the portfolio, including some in green hydrogen, solar, wind and hydro energy and waste management projects.

The company is set to become the first to generate international plastic credits for collecting and recycling plastic waste in the country. Under this, for every ton of plastic collected and recycled, the company earns 2 plastic credits. Plastic credits aim to reduce plastic waste.

This is an optionality over and above carbon credit market. It has partnered with Singapore based Impact Climate Asset Management PTE Limited to contribute Rs 200 crore towards a Rs 1,000 crore climate impact fund to develop greenhouse gases mitigation projects. The company is also driving smart city mission projects and has been onboarded by Varanasi Smart City.

The stock trades at single digit PE of 7.3 times. And enjoys return on equity and capital employed of 176% and 236% respectively. If this looks too good to be true, that's because it might be.

There are risks in this business. The key risk - first is the volatility in the prices of carbon credit. For instance, in Europe, the price witnessed a decline from 30 Euro to 5 Euros between 2008 to 2012.

The Indian govt is planning to address this through stabilisation fund to have a minimum or floor price for these, to boost the carbon trading market and cut emissions. There is also a talk of national carbon market that may help with price discovery and demand.

The second risk is credibility of these carbon credits - whether they really offset global warming. These credits need approval from top independent verification bodies, and not all carbon credits may make the cut.

The third risk is policy related. Eki Energy's stock price took a big knock on announcement of carbon Credit Export Ban until India's commitment of reduction of 45% emission intensity of GDP is met.

However, as per the management, while the policies intend to deepen and flourish carbon trading market within India, it does not impact the voluntary carbon market.

All in all, Enking International is at a point of great opportunity along with risks. And it makes sense to keep it in the watchlist.

The third company on the list belongs to construction industry. Bigbloc Construction Ltd manufactures AAC blocks, or aerated autoclaves concrete blocks, that is a better quality substitute of red bricks in construction.

In the last few years, AAC has been replacing bricks for two key reasons. First, AAC has become a cheaper construction material as compared to red bricks. It is around 25% cheaper as compared to the red bricks.

Second, AAC is a green product. It uses thermal power plant's waste product, i.e. fly ash as input material, thus taking that much carbon emission out of the environment which would otherwise need to be disposed.

The company generates carbon credits to the tune of 65,000 units per annum. It is undertaking a capex post which it claims to be the biggest player in India in ACC.

Once these enhanced capacities come into full production, the management expects generation of carbon credits to increase from 65,000 units to 250,000-300,000 units of carbon credit every year.

So unlike Enking, which could be a very high-risk high reward play on carbon credits, for Bigbloc, carbon credits is an optionality play.

Please note that these are not stock recommendations, but names to watch out for.

For today, that's all. I'll share more as further developments unfold in the green energy space.

If you like the video, do let me know through your likes and comments. I would love to have your feedback.

Thank you for watching. Goodbye.