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5 Energy Stocks Poised to Keep Growing Earnings

Jun 19, 2023

5 Energy Stocks Poised to Keep Growing Earnings

Crude oil prices have been on a roller coaster ride since the beginning of 2022.

In mid-2020, they were trading within the range of US$ 60-70 per barrel. But then came the Russia-Ukraine war, which drove down supply across the world leading to a massive price surge.

Crude oil prices ended up surging to a 10-year high of US$ 102 per barrel, only to subsequently decline to half its value.

Now these kind of price movements drum up a large import bill for oil dependent countries such as India. Amid all these challenges, the Indian energy sector is evolving and expanding, presenting opportunities for growth.

Companies are investing heavily when it comes to renewable and clean energy, without leaving any stones unturned.

In this context, there are five standout energy stocks that show promising signs of sustained earnings growth.

#1 Linde India

At the top of our list is Linde India.

Linde India is a leading industrial gas company operating in India. The company enjoys a rich history that dates back several decades.

It specializes in producing and supplying a wide range of industrial gases, including oxygen, nitrogen, hydrogen, and argon, along with various speciality gases.

This division accounts for 76% of the business. The balance 24% comes from project engineering division which comprises of designing, supply, installation and commissioning of tonnage air separation units

The company serves diverse industries such as steel, automobiles, manufacturing, healthcare and chemicals.

Linde India Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 9.91% 7.86% -18.98% -15.67% 44.14%
Operating Profit Margin (%) 15.65% 15.27% 24.73% 27.70% 28.47%
Net Profit Margin (%) 0.47% 0.88% 41.28% 10.16% 23.75%
Return on Capital Employed(%) 4.40% 5.03% 44.49% 10.33% 28.10%
Return on Equity(%) 0.69% 1.32% 40.02% 6.78% 20.27%
Source: Equitymaster

The sales and net profit of the company have grown at a 5-year compounded annual growth rate (CAGR) of 1.3% and 117%, respectively.

This growth was driven by demand for liquid and compressed medical oxygen during the pandemic, which was later replaced by growth in industrial gases.

The growth in the company's project engineering division was driven by higher revenues from steel and refinery sectors.

However, the profit in CY2021 was much higher due to the sale of a closed factory land at Kolkata.

The 5-year average Return on Equity (RoE) and Return on Capital Employed (RoCE) stand at 13.8% and 18%, respectively.

The industrial gases market is expected to grow at 9%, (around 1.5 times of India's long-term industrial production growth of 6%) and Linde India is at the forefront of this.

Recently the company approved an expansion plan of Rs 1.5 bn for an air separation plant. This plant is expected to be on stream by December 2023 and will be financed by their internal funds.

Linde India has no debt on its books and has rewarded its shareholders with dividends. The 5-year average dividend yield stands at 0.5%.

To know more about the company, check out its financial factsheet and latest quarterly results.

#2 Oil India

Next on our list is Oil India, a Ministry of Petroleum and Natural Gas undertaking.

Oil India is a fully integrated oil and natural gas company that explores, develops, produces and transports crude oil, natural gas, and liquified petroleum gas.

Apart from its core business, the company also generates electricity through solar, wind, and green hydrogen sources.

The constant expansion undertaken by the company has allowed it to ascend to the second-largest oil and natural gas company in the country. In 2022, Oil India contributed 10% of the country's crude oil production.

Oil India Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 6.56% 27.33% 33.73% -5.64% 44.06%
Operating Profit Margin (%) 46.16% 48.75% 32.15% 30.22% 38.80%
Net Profit Margin (%) 25.56% 23.50% 24.25% 18.44% 22.39%
Return on Capital Employed(%) 10.38% 12.41% 14.18% 12.73% 22.05%
Return on Equity(%) 9.34% 11.16% 19.18% 17.69% 24.78%
Source: Equitymaster

The business has grown strongly on the back of steady growth in volumes. While revenue has clocked a 5-year CAGR of 14% in the last five years, the net profit has grown by 28% over the same period.

Its 5-year average RoE and RoCE were at 13.8% and 18.5%, respectively.

Oil India aims to enhance its business further, aiming to mimic its past growth trajectory. To this effect, the company has outlined a capex of Rs 130 billion (bn) for the financial year 2024 and another Rs 150 bn for the financial year 2025.

This expansion will be funded via a mix of debt and internal accruals, in the ratio of 70:30.

It has a debt-to-equity ratio for the financial year 2022 was at 0.5x. But despite the debt on its books, the company has paid dividends consistently since 2010. Its 5-Yr average dividend yield amounts to a whopping 7%.

To know more about the company, check out its financial factsheet and latest quarterly results.

#3 GAIL

Third on our list is GAIL.

GAIL is one of India's leading integrated natural gas companies that deal in liquid hydrocarbons and petrochemicals. It's gas-pipeline transmission business is a natural monopoly and the company enjoys a strong market franchise in this business.

Over the past five years, the company has witnessed a CAGR of 11% in its revenue, owing to the substantial demand for natural gas. It has registered a CAGR of 18% in its net profit during the same period.

GAIL Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 11.57% 39.95% -4.12% -21.23% 60.62%
Operating Profit Margin (%) 15.77% 14.27% 14.57% 14.57% 17.59%
Net Profit Margin (%) 8.78% 8.60% 13.11% 10.70% 13.25%
Return on Capital Employed(%) 16.07% 21.46% 20.62% 13.59% 23.69%
Return on Equity(%) 11.86% 14.95% 19.97% 11.99% 20.98%
Source: Equitymaster

Its 5-year average RoE and RoCE were at 15.9% and 19.1%, respectively. The company has been paying dividends consistently since 2003.

The company has long and medium-term gas tie-ups in and outside India which ensures ample supply and enhances the revenue visibility for the company.

And going forward, it's strong financial profile and growth plans are expected to drive its revenue and profit growth.

In the financial year 2022, the company incurred its highest-ever capex of about Rs 91 bn on pipelines, petrochemicals and equity to JVs, 15% higher than the annual target of Rs 79 bn. For the financial year 2024, it plans to spend Rs 100 bn.

GAIL has a debt-to-equity ratio of 0.1x and an interest coverage ratio of 65.2x, allowing it to expand via external funds. This has also enabled the company to earn the position of a dividend paymaster. The 5-year average dividend yield stands 3.7%.

To know more about the company, check out its financial factsheet and latest quarterly results.

#4 Indrapastha Gas

Fourth on our list is Indrapastha Gas.

Indraprastha Gas is a leading natural gas distribution company in India. It supplies compressed natural gas (CNG) and piped natural gas (PNG) to residential, commercial, and industrial customers in the National Capital Region (NCR) of Delhi.

The company enjoys long-term natural gas sourcing tie-ups with government and other private companies, ensuring steady revenue generation and long-term visibility.

Indrapastha Gas Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 19.82% 27.39% 12.47% -23.73% 56.00%
Operating Profit Margin (%) 24.21% 21.95% 23.38% 29.58% 24.39%
Net Profit Margin (%) 14.39% 13.24% 17.43% 21.56% 17.71%
Return on Capital Employed(%) 33.17% 32.20% 32.60% 24.70% 28.42%
Return on Equity(%) 21.68% 21.15% 25.82% 20.06% 21.58%
Source: Equitymaster

Long-term contracts in tandem with the high demand for natural gas have helped the company boost its revenue and net profit at a CAGR of 15% and 19.9%, respectively, in the last five years.

The RoE and the RoCE have registered a 5-year average of 22% and 30.2%, respectively.

With no debt on its book, Indraprastha Gas continues to augment its infrastructure to meet the increasing demand for CNG. The growth drivers for the increase in demand for CNG are car and commercial vehicle manufacturers coming up with CNG variants.

The company is in the process of enhancing its compression capacity by adding new stations.

#5 ONGC

Last on our list is Oil and Natural Gas Corporation (ONGC).

ONGC is India's largest crude oil and natural gas producer, accounting for roughly 70% of the country's domestic production.

Its wholly-owned subsidiary, ONGC Videsh, is the largest Indian multinational in the energy space, participating in 36 oil and gas properties across 17 countries.

ONGC Financial Snapshot (2018-2022)

  2017-2018 2018-2019 2019-2020 2020-2021 2021-2022
Revenue Growth (%) 12.94% 27.47% -6.11% -22.43% 57.08%
Operating Profit Margin (%) 18.57% 18.22% 14.45% 16.52% 16.58%
Net Profit Margin (%) 7.15% 6.69% 2.46% 5.61% 8.95%
Return on Capital Employed(%) 13.09% 14.50% 4.99% 9.55% 19.91%
Return on Equity(%) 15.33% 18.23% 8.08% 10.67% 16.86%
Source: Equitymaster

The sales and profit growth has been resilient, having doubled in the last 5 years. The RoE has also improved to 19.9% in the financial year 2022. The relatively robust performance of the business, led by a rally in the crude oil prices has resulted in the current valuation.

ONGC made significant discoveries in 2022-23, declaring a total of 8 oil wells. Of these 8, 3 have already been monetised. The discoveries for the beginning of the financial year 2023-24 are also decent, with the company announcing 2 prospective oil well.

It has announced a capital expenditure plan of around Rs 300 bn for the financial year 2024, akin to the Rs 300 bn spent in the previous year. The expansion would be fully funded through internal accruals.

ONGC has a debt-to-equity ratio of 0.3 times, which isn't alarming. But despite some debt on its books, the company has remained a dividend paymaster, boasting a 5-year dividend yield of 4.6%.

To know more about the company, check out its financial factsheet and latest financial results.

In conclusion

The Indian energy sector offers a promising landscape for investors looking for stocks with strong earnings growth potential. But despite the strong prospects, investors should exercise caution and closely monitor these stocks.

The performance of a company is greatly influenced by market conditions, industry trends, and economic factors, particularly during expansion phases.

Thus, it is essential to thoroughly assess the fundamental aspects of each company, ensuring investment decisions align with individual risk tolerance and investment objectives.

Before leaving, check out the below video where Richa Agarwal shares three top energy stocks and why they deserve to be on your watchlist.

Happy Investing.

Investment in securities market are subject to market risks. Read all the related documents carefully before investing

Safe Stocks to Ride India's Lithium Megatrend

Lithium is the new oil. It is the key component of electric batteries.

There is a huge demand for electric batteries coming from the EV industry, large data centres, telecom companies, railways, power grid companies, and many other places.

So, in the coming years and decades, we could possibly see a sharp rally in the stocks of electric battery making companies.

If you're an investor, then you simply cannot ignore this opportunity.

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