Weekly Musings – NFO Pick (ICICI Prudential Energy Opportunities Fund)

1 Jul 2024 , 08:51 PM

WHAT DO WE UNDERSTAND BY THE ENERGY BASKET?

We often use the term energy to represent the power sector or the oil & gas sector. Actually, energy is a much broader and all-encompassing theme. When we are talking about the portfolio mix of the ICICI Prudential Energy Opportunities Fund, we are looking at energy over multiple tiers or levels. Here is a quick dekko at what the energy theme means.

• At the first level of energy are the oil & gas theme. The oil & gas theme is further classified into the upstream, midstream, and the downstream sectors. The upstream sector typically comprises of companies that explore and extract oil and gas. The midstream sector focuses on the processing, storage, and transportation of fuel. The downstream sector includes refining, marketing and distribution of oil and gas.
• The second pillar of the energy theme is the power sector. Let us first focus on traditional power. This is again divided into three parts. The generation of power includes the actual generation of power through coal, gas, hydro etc. Then comes the transmission of power, which entails moving the power from the generating unit to an electrical sub-station. Finally, there is distribution which is the last mile of taking power from the sub-station to the individual households. All three are covered in power.
• The third area is the new energy theme, which is still growing in India and is likely to take off in a big way in the coming years. This includes the major investments in the solar and the wind value chain. This encompasses, cell and module manufacturing, ancillary equipment, EPC, wind value chain etc.
• Finally, there are the energy ancillary industries. These companies are not directly involved in oil & gas or power; but offer support and are actually inevitable to the energy value chain. These include companies involved in downstream chemicals, petrochemicals, energy consultancy, capital goods for power and hydrocarbons, oil shipping, oil pipelines, green hydrogen, green ammonia, bio energy value chain, energy transmission equipment etc.

It is the combination of these 4 aspects of the energy chain that makes the energy theme. That offers a fairly broad palate for the fund to invest in.

UNDERSTANDING THE INDIA ENERGY OPPORTUNITY

India presents a unique dichotomy in the energy sector. It is growing to be a formidable contributor to global output and demand, but its per capita share is still too low. Here are some points that highlight this opportunity.

• India’s energy consumption has nearly tripled in the last 20 years. Currently, India is the fourth largest energy consumer in the world. However, its share of global energy consumption is just about 6%, while the US is 16% and China is 26%.
• India’s per capita energy consumption is less than a third of the global average. The per capital consumption in China is about 4.4X and Korea is 9.5X of India. Brazil is more than twice of India’s per capita energy consumption and South Africa is more than 3 times.
• In terms of absolute GDP, India is today ranked fifth in the world and is expected to be ranked third by the year 2030. However, for that kind of GDP mass, the low energy consumption on a per capita basis, shows a huge unmet demand opportunity.
• The other big opportunity is the extent of EV (electrical vehicles) penetration. In India, the current EV penetration is just about 2%, compared to the global average EV penetration of 17.5%. That is the one area where a lot of work is happening on the city infrastructure front.

The good thing is that the government of India has taken steps to boost the energy sector with a slew of reform measures. Remunerative prices, gas pricing reforms, windfall taxes, oil risk hedging, unified tariffs etc are some of the measures that have helped to get to better grips with the energy situation in India and meet the big opportunity.

HOW LUCRATIVE IS ENERGY AS AN INVESTMENT THEME?

There are some interesting numbers about the energy sector opportunity in India and how the market cap does not reflect the profit pool.

• If we look at the market themes, the energy companies (ex-Reliance) contribute about 19% of the net profits of the index as a whole. However, they only constitute about 8% of the market cap of these indices. That means, there is still a gap in the way these energy companies in India are being valued.
• The energy companies in India have traditionally quoted at a discount to the index valuations. For instance, the Nifty Energy Index is currently trading at a valuation of discount of -38% to the Nifty while the historical discount has been a huge -46%. That is in terms of the P/E ratio. Even if you look at the P/BV ratio, the energy index is at a -35% discount to the Nifty valuations while the historical average has been around -50% discount to the generic indices.

Let us now turn to the underlying philosophy of the ICICI Prudential Energy Opportunities Fund.

THE UNDERLYING PHILOSOPHY OF THE FUND

Here is what investors need to know about the fund.

• The stock mix will include traditional energy, new energy, energy ancillary units etc. The focus will be essentially on large cap theme with a bias for the long term energy narrative. The fund will focus on companies with a strong re-rating potential.
• The 5 stocks with the highest weightage in the Nifty Energy Index are Reliance Industries (31.0%), NTPC (14.3%), Power Grid Corporation (11.8%), Coal India (9.4%), and ONGC (8.6%).

The energy theme in India is likely to be driven by a plethora of factors and triggers. These include strong energy demand, structural growth in per capita energy consumption, energy as a catalyst for growth, climate change, premiumization, manufacturing focus, etc.

GLANCE AT THE ICICI PRUDENTIAL ENERGY OPPORTUNITIES FUND NFO

Here are some details of the ICICI Prudential Energy Opportunities Fund NFO you must know to decide on investing in the fund.

1. The NFO of ICICI Prudential Energy Opportunities Fund opened for subscription on July 02, 2024 and will close on July 16, 2024. Being an open-ended equity oriented thematic fund, it will reopen for sale and repurchase anywhere between 3 days and 15 days of NFO closure. While the fund has no lock-in period (other than the conditional exit load disincentive), it is suggested to hold such Funds for a period of 5 years or more to get full benefits of the energy play in India.
2. On the Standard SEBI Risk-O-Meter, the ICICI Prudential Energy Opportunities Fund will be ranked as a Very High Risk Fund. The high risk is an outcome of the predominant exposure to equities that the ICICI Prudential Energy Opportunities Fund will have; especially the concentration risk of being focused on the energy theme. In addition, there is also the risk of entering the market at lifetime highs of the Nifty and the Sensex. The fund will be benchmarked to the Nifty Energy TRI. There is also the risk that the fund managers may not be able to outperform the underlying benchmark.
3. The ICICI Prudential Energy Opportunities Fund is about long term capital appreciation through an active sectoral approach to investing purely on energy related companies. The fund will run a portfolio that invests in companies that are part of the energy chain in India and also the companies that benefit from the energy transition underway in the Indian economy. Being an equity index fund, its predominant allocation will be to equities that are part of the Nifty Energy Index.
4. Investors can invest in the NFO of ICICI Prudential Energy Opportunities Fund in minimum size of ₹5,000 and in multiples of ₹1 thereof. This also applies to switch-ins during the NFO while additional purchases can be in such multiples too. The fund also supports the structuring of systematic investment plans (SIPs), systematic transfer plans (STPs) and systematic withdrawal plans (SWPs).
5. There will be an exit load of 1% of the redemption amount, for redeeming within 3 months of the allotment of the fund. However, there is no exit load if the fund is held for more than 3 months from the date allotment and sold after that. Exit loads apart; investors are advised to hold the fund for a minimum period of 5-7 years to get full benefits of the India energy transition theme playing out and translating into stock market returns for the investors.
6. The ICICI Prudential Energy Opportunities Fund does not give any guarantee on returns, being an equity oriented and market risk driven active thematic fund. Despite the best efforts of the research team and the fund managers, returns would still be uncertain and the returns may diverge from the index to which it is benchmarked. This is an active fund where the fund managers to create alpha by beating the index. However, it is also possible that the fund manager may underperform the underlying index.
7. The ICICI Prudential Energy Opportunities Fund NFO will offer the growth option and the IDCW (income distribution cum capital withdrawal) option. Within the IDCW option, the fund will offer growth option, the dividend payout option, and the dividend reinvestment option too. The ICICI Prudential Energy Opportunities Fund will offer investment via the Regular Plan as well as through the Direct plan.
8. The performance of the ICICI Prudential Energy Opportunities Fund will be benchmarked to the underlying Nifty Energy TRI index.. The TRI (total returns index) is more reflective as it includes the impact of dividends and capital movement. However, being an active fund, the fund endeavours to beat the index and generate alpha. However, anecdotal evidence has shown that it is not possible for fund managers to consistently beat the index on a sustained basis.
9. The fund managers for the ICICI Prudential Energy Opportunities Fund will be Sankaran Naren and Nitya Mishra. In addition, the overseas investments made by the fund will be managed by Sharmila D’Mello.
10. The ICICI Prudential Energy Opportunities Fund will be classified as an equity fund for tax purposes; as long as its equity exposure is above 65%, which is the intent. The short term capital gains (held for under 1 year) will be taxed at 15% while long term capital gains (held for over 1 year), will be taxed at a flat rate of 10% beyond a minimum threshold exemption of ₹1 Lakh per financial year. There will be no indexation benefits on long term capital gains.

The ICICI Prudential Energy Opportunities Fund NFO offers an opportunity for investors to participate in the highly celebrated energy and energy transition theme in India. It is a long haul theme, but it is certainly a theme whose time has come.