The Indian stock market rocketed up after Narendra Modi was elected prime minister and promised a strong business environment – but the honeymoon seems to be over. The stock market index, the BSE SENSEX, is down more than 15% from its peak of 29,000 in March of this year. Are there any hidden gems?
We looked for companies with market cap of more than $1 billion that perform well on our Combined Alpha Model. As its name says, it combines our other models for a single score. We created a screen that weeded out companies with poor credit and earnings quality. Below is the list of 10 companies that passed through the screens. We’ll focus on Bharat Petroleum (BPCL.NS) as an example of a company that does well on our Combined Alpha Model with a score of 90. It is engaged in exploration and production of oil and natural gas and has the best credit scores on the StarMine models amongst its peers.
Source: Thomson Reuters Eikon/ StarMine
Smooth strategy
Although lower oil prices have hurt BPCL revenues, the company continues to execute on its expansion projects in Kochi and Bina, while controlling costs. The demand for oil and natural gas continues to grow in India, and as a major player in the market, BPCL is well positioned to take advantage. While smaller private players are entering the market too, they currently have only about 3% of market share. Margins continue to grow and BPCL has strong cash flow from operations to fund its expansions.
Source: Thomson Reuters Eikon/ StarMine
Flowing cash
As you can see in the chart above, BPCL has generated strong positive cash flow from operations that have been increasing over the past four years. In the last reported annual results, BPCL had a 10 year high net income of 48 billion rupees. But even more encouraging is that cash flow from operations was a record high of 207 billion rupees. That strong cash flow helps fund expansion projects. When earnings are backed by strong cash flow, they tend to be more sustainable in the long term. It’s one reason BPCL scores well on our Earnings Quality model.
Source: Thomson Reuters Eikon/ StarMine
Covering expenses
Despite ramping up capital expenditures on expansion projects (BPCL has increased its capital expenditures in each of the last three years), those investments seem to be adequately covered by cash flow from operations. In each of the last three years, despite increasing levels of investment, cash flows from operations have also increased at a faster rate. In the last reported annual period, capex was 109 billion rupees and cash flow from operations was 207 billion rupees. In fact, the company has also lowered its total debt, the combination of long term and short term debt is 255 billion rupees now, lower than it has been at any point in the last three years.
Source: Thomson Reuters Eikon/StarMine
Drilling for results
Although BPCL has not benefitted from falling oil prices, it performs well on almost every StarMine model. According to the valuation model, the stock does not look expensive. In India, the government had historically subsidized fuel, and compensated companies like BPCL (albeit not always in a timely manner) for the subsidy. Now with oil prices as low as they are, the government has no need to subsidize the fuel, in fact, it is charging a fuel tax. While this does not directly affect BPCL, this means that the government has more money in the coffers to fund its growth strategy, and any growth in India is directly ties to demand for oil and natural gas, which in turn helps BPCL. The company seems to be in a sweet spot now.
