The progressive transformation of any nation, from a developing nation into a developed one, largely depends on how efficiently it uses energy. The energy sector is the lifeline of any economy; however, the performance of India’s energy sector has somehow remained shady.

Be it power generation or gas pricing, the energy sector has faced many challenges and often been surrounded by huge controversies. It stands to reason why investors investing in energy companies haven’t been able to see returns even in the long term. Companies such as NTPC, Crompton Greaves, PTC India, ONGC, and Sterlite Technologies, to name a few haven’t rewarded investors in the last 6-8 years. On the other hand, sectorial funds investing in this sector have drained wealth over the last 5 years.
 

Energy Fund—So far not so good
 

Scheme Name	6 Months	1 Year	3 Years	5 Years	SINCE INCEPTION	Sharpe	SD Annualised
Sahara Power & Natural Resources Fund(G)	-3.9	-9.5	7.2	-0.7	4.59	0.04	23.34
Escorts Power & Energy Fund(G)	0.5	3.0	16.3	-1.1	7.85	0.13	25.71
Reliance Diver Power Sector Fund(G)	0.0	-5.1	8.8	-3.3	18.66	0.05	27.44
UTI Energy Fund(D)	-5.5	-9.3	7.3	-0.5	(2.49)	0.03	22.92
DSPBR Natural Res & New Energy Fund-Reg(G)	-10.1	-11.8	8.9	1.5	6.86	0.04	20.56
category average	-3.8	-6.5	9.7	-0.8	7.1	0.1	24.0
category average of diversified equity funds	-1.3	2.8	19.7	10.3	-	0.21	17.08
NIFTY 50	-5.5	-7.0	11.9	5.4	-	0.11	15.45
S&P BSE METAL Index	-28.4	-37.9	-10.5	-15.6	-	(0.13)	30.77
S&P BSE OIL & GAS Index	-5.4	-18.6	3.0	-3.4	-	(0.02)	21.11
S&P BSE Power Index	-8.8	-12.6	-1.5	-9.4	-	(0.05)	27.07

Data as on November 16, 2015
(Ace MF PersonalFN research)

The good news is there is a possibility that this scenario might change, and change for the better this time. This raises a pertinent question—should you continue to invest in Energy sector funds, at this juncture?

Let’s first understand why the future of Energy sector looks power packed

For those who don’t track the developments in the sector, India faces power cuts and shortages not merely because of the lack of power generation capabilities and capacities but mainly due to the disrupted supply of coal, which is used as the feedstock in most Indian power generation plants. Taking a serious note of this, the NDA Government has been working on loosening the bottlenecks in coal distribution and supply.

Subsequently, Mr. Piyush Goyal, Minister of State with Independent Charge for Power, Coal and New & Renewable Energy, at an event organised by KPMG, recently said, “I have been on record to say that I judged that by 2017, India should not need to import coal except for those coastal plants where it is very difficult to transmit coal. I am fairly confident the era of shortages is over.”

Cementing these sentiments Mr. Dharmendra Pradhan, Minister of State for Petroleum and Natural Gas, made a vital statement at the same conclave, “Energy security and accessibility is important for the overall well-being of the nation. It is important that we identify the energy requirements and accordingly come up with a vision plan, making it our focus for the coming years. A comprehensive energy policy is the need of the hour.” Pradhan first expressed the Government’s intent to revive the investors’ interest in the sector in 2014 at the 21st World Petroleum Congress in Moscow.

To this effect, in August this year, we saw the Ministry of Railways, Ministry of Power, and Ministries of New & Renewable Energy and their organizations sign 4 Memorandum of Understandings (MOUs) of cooperation in the areas of Electricity Transmission, Energy Conservation, and promotion of Renewable Energy in a time-bound manner. This icing on the cake is the Railway Minister’s ambitious plans of transforming the Indian Railways into a solar power leader, by putting to use the huge land bank it owns for solar power generation through the Public Private Partnership (PPP) Model.

Naturally, inter-ministerial cooperation and a clear agenda is expected to completely transfigure India’s energy sector. Although it’s too early to judge whether or not the fate of the energy sector will change, the reforms introduced in the first round are spot on.

The Government sanctioned the Ujwal Discom Assurance Yojna (UDAY) lately. According to this:
 

• States shall take over 75% of Power Distribution companies (DISCOM) debt as on 30 September 2015 for a 2 year duration—50% of DISCOM debt in 2015-16, and 25% in 2016-17.


• The Government of India will not include the debt taken over by the States as per the above scheme in the calculation of the fiscal deficit of respective States in the financial years 2015-16 and 2016-17.


• States will issue non-SLR including SDL bonds in the market or directly to the respective banks / Financial Institutions (FIs) holding the DISCOM debt to the appropriate extent.


• The DISCOM debt not taken over by the State shall be converted by the Banks/FIs into loans or bonds with interest rate not more than the bank’s base rate plus 0.1%. Alternately, this debt may be fully or partly issued by the DISCOM as State guaranteed DISCOM bonds at the prevailing market rates which shall be equal to or less than bank base rate plus 0.1%.


 

The features of the UDAY scheme may not give you a clear picture of what changes this might bring in. Don’t be surprised when you see that UDAY may help DISCOMs improve their finances, improve operational efficiencies, and reduce cost of power.

The Government has already decontrolled diesel prices, making it possible for oil marketing companies such as Indian Oil Corporation (IOC), Bharat Petroleum Corporation Ltd. (BPCL), and Hindustan Petroleum Corporation Ltd (HPCL) to improve the health of their finances and chalk out capex plans. .

PersonalFN insight: Strategy you should adopt

As far as investing in energy sector funds go, you should avoid them. After all there are too many “ifs” and “buts” to risk your money. Remember, technology sector funds made steep losses in the aftermath of the dotcom bust, story of infrastructure funds ended in an anticlimax in 2007. Who knows, energy funds might be the next ones to surprise us, and a nasty one at that. Thus, play safe and consider investing in opportunities funds instead. Like the name suggests, opportunities funds may identify quality stocks in energy sector. This approach can prove more rewarding and lower your risk exposure. It is always better to bet selectively on 5-6 promising sectors rather than betting on just one. Those who have tried staking their monies on one sector, more often, ended up throwing in the towel.

There is a ray of hope as far as development of the energy sector in India is concerned. If indeed the situation changes, the sentiments of investors will reflect the improvements. At present, most of the Energy sector stocks are trading at low to reasonable valuations because of their questionable prospects. If investors see a promising future for energy sector companies, the re-rating of the sector can’t be ruled out.

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