India is likely to exceed most of its 2015 Paris agreement targets and BofA Securities is of the view that stocks under nine themes stand to gain as the country steps up effort to reduce emissions and fight climate change.
“We expect India would continue to make good progress on curtailing pollution,” BofA Securities said in a report. India seems to be contemplating setting a carbon neutrality target to join global counterparts such as China as well as the US.
Balancing net carbon neutrality with developmental needs could be a challenge and India would also expect pledges for financial support before declaring a net carbon-neutral deadline.
India could further raise its emission cut targets, potentially by 2047, the country's 100th year of independence, as indicated by Prime Minister Narendra Modi earlier, the report has said.
Here is a list of themes and stocks that can benefit from India's clean-up push:
Theme 1: Curtailing diesel consumption
Rail electrification and rail capacity ramp-up would play a key role in curtailing diesel use. In line with India’s target to achieve 100 percent rail electrification by FY23, the railways recorded its highest ever route electrification in FY21 at around 6k km, 14 percent higher than the previous best in FY19, despite COVID-19 disruptions.
The onus will shift to solar energy. The PM-KUSUM scheme aims to add 10-15GW of new capacity, facilitate two million farmers to set up standalone solar pumps and 1.5 million farmers to solarise grid-connected pumps.
Theme 2: Ramp-up of gas in energy mix
The government is looking to bring natural gas under the GST regime. Given state taxes on natural gas are high (6-24.5 percent), BofA believes that bringing it under GST could lower gas costs and improve its adoption, particularly by industrial users.
Besides, BofA believes that customers would benefit from higher competition and capex likely from the open-access code notified by the CGD regulator
Theme 3: Step-up in renewable energy
Driven by one of the largest renewable energy rogrammes globally (175GW/450GWs target by 2022/2030), the share of non-fossil fuel-based energy in India’s installed power capacity has already reached 38 percent against the Paris climate conference target of 40 percent by 2030.
Theme 4: Making pollution norms stringent
The pace of installation of pollution-control equipment in India’s thermal power generation sector had been lagging compared to its 2022 targets.
Despite requests to push out the 2022 deadline to 2024 for all power plants, the government while allowing extension till December 23/December 24 to some power plants, has stuck to the 2022 deadline for plants within 10 km of cities with a population of one million or more.
Theme 5: Namami Gange mission
The government is also tackling the River Ganga's water pollution by increasing sewage treatment capacity, water quality monitoring, etc. There is a capex opportunity of Rs 200 billion. Stocks exposed are VA Tech Wabag, and ION Exchange.
Theme 6: Improving energy efficiency standards
BEE improving energy-efficiency standards across consumer appliances—star ratings for frost-free refrigerators, fluorescent lamps, air-conditioners, transformers, colour TVs, geysers, etc.
Theme 7: Increasing private participation
The private sector is also complementing the efforts of the government and is targeting to become carbon neutral by 2030/50.
Theme 8: Increasing ethanol blending in petrol
Ethanol blending in petrol increased from 1.4 percent in 2014 to 5 percent in 2020. The government is targeting to achieve 10 percent by 2022 and has recently preponed its target to achieve 20 percent from 2030 to 2025.
Theme 9: Introducing hydrogen in the energy mix
India plans to incorporate hydrogen in its energy mix. Pilots on hydrogen vehicles are underway. There are also plans to blend hydrogen with CNG to leverage CNG pipeline infra and reduce hydrogen transportation costs.
Stocks that could benefit:
BofA Securities ran a screener for names that could benefit from these nine themes and they are Britannia Industries, HUL, Nestle India, Marico, Ambuja Cements, UltraTech Cements, Havells India, Voltas, Crompton Consumer, RIL, L&T, Hindalco, NTPC, Concor and GAIL India, Gujarat Gas & IGL.
BofA Securities placed a target of Rs2,700. The price objective implies a target PE in line with HUL's current one-year forward multiple at the pro forma EPS that accounts for the proposed merger of GSK's consumer business, which we think is justified given a healthy growth profile.
BofA Securities price objective placed at Rs 20,000 for Nestle India is based on DCF (WACC 10 percent, terminal growth rate 6 percent). It implies a one-year forward P/E of 61x, at a slight premium with the five year-historical average P/E - justified, in our view, given strong growth revival.
BofA Securities values Marico on DCF methodology and validates the PO by comparing it with historical average. The target is placed at Rs 345 that implies a one-year forward P/E multiple of 30x, which bakes in potential derating given weak execution.
BofA Securities values the company at Rs7,640, and the price objective is based on 19x EV/EBITDA on FY23E. The target EV/EBITDA multiple is 2SD above the company's five-year average forward EV/EBITDA multiple to account for (1) Improved pan-India market share in the past 3 years and (2) an improving EBITDA/ton outlook given the focus on the use of green power.
The price objective of Rs1,214 is based on 57x two-year forward PE, slightly below +3SD levels to its long-term average valuations.
We think premium valuations are justified given (1) its position as a top-three players in the majority of electricals segment, (2) unmatched management track record and (3) higher returns.
The price objective of Rs 1,187 is based on 42x estimated two-year forward earnings for 19 percent EPS CAGR expected over FY20-23E, as improving earnings recovery is seen as supportive.
The price objective of Rs480 is based on 22x two-year forward earnings or close to +1SD levels to the stock's long-term average valuation multiple.
The price objective of Rs168 comprises (1) core businesses (Rs 154 a share) and (2) the market value of investments in ONGC and others (Rs 31 a share). We deduct net debt of c. Rs 17 a share.
BofA used DCF-based valuation for Gujarat Gas Limited (GGL) over a period of 10 years. We obtain an enterprise value (EV) of Rs390bn or c.$5.3 billion. Reducing net debt of Rs11.8 billion, the global investment bank arrives at a price objective of Rs550/share.
The price objective of Rs1780 for L&T is based on an SoTP valuation. BofA valued its parent core business (adjusted for dividend income from its subsidiaries/JVs) at 20x 2 year forward earnings, for core business RoEs of 16 percent in FY23E
The price objective of Rs2,550 is based on a sum-of-the-parts valuation. The EV of the refining, petrochemical and E&P businesses is calculated on a DCF basis, using a WACC of 10 percent. Refining (Rs349) is 13 percent of the EV, petrochemicals (Rs 508) is 19 percent and E&P (Rs7) is 0.24 percent.
The price objective of Rs 114 for NTPC is based on a SOTP approach. We value NTPC parent and its subsidiaries using FCFE, with a cost of equity of 12.75 percent and a terminal growth rate of 3.4 percent.
BofA Securities used DCF-based valuation for Indraprastha Gas Limited (IGL) over a period of 10 years. On a WACC of 10.2 percent and 3 percent terminal growth, the global investment bank obtained an enterprise value (EV) of Rs278bn. The price objective is Rs 486.
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