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Graham’s Number for Indian stocks

They say that profits are made at time of buying and not selling. Now suppose you have shortlisted companies, whose shares you want to buy, i.e. you have a Ready-2-Buy-List with you. (Check our favorite ones here). So would you buy these stocks at any given price or would wait to buy at prices, which are low, atleast by some standards? We assume you belong to the small minority (fortunately) which believes that it is wiser to adhere to some set valuation standards. Though not widely used in Indian markets and having its own sets of shortcomings, we decided to use Graham’s Number as the standard to evaluate our favorite stocks.
 
Graham’s Number (GN)
 
Graham’s Number measures a stock’s fundamental value by taking into account the company’s earnings per share and book value per share. The Graham number is the upper bound of the price range that a defensive investor should pay for the stock. According to the theory, any stock price below the Graham number is considered undervalued, and thus worth investing in. The formula is as follows:
 
 
But before we share details of Graham’s Number for chosen Indian companies, we would request you to read this article. The article highlights the dangers of using just one parameter like GN for stock buying decisions. For those who don’t want to read the entire article, it would be suffice to say that GN is based on just 2 of the total 7 criterions suggested by Graham. So, just using this number means that you are missing out on other 5 equally important criterions.
 
So without any further delay, here are the GN’s for some of our chosen stocks-
 
 
  • We have calculated two values for Graham’s Number. One is named G (Column 8)and takes into account EPS of last twelve months (TTM) alongwith current book value per share. Second is G* (column 10) and takes into account the 3 year average EPS values and current book value. Taking 3 year average smoothens out any extraordinary earnings of one year and helps in arriving at a more normalized EPS value. Though we would have preferred a 5 year average EPS, we could not find sufficient data for all the stocks.
  • Stocks like Sterlite Industries, BOB, Balmer Lawrie, Graphite India are trading almost 40% lower than their respective GNs. Please be reminded that a price below GN is considered to be a sign of undervaluation.
  • But we, being a lot more risk averse, decided to add a margin of safety of 25%. We found that even if we reduce the values of GN by 25% (in column 12), these stocks are still available 25-30% below their GNs. This is a clear sign that any investment made at current levels, may not be a bad idea at all.
  • You won’t be wrong if you believe that our previous statement (in particular, underlined part) is speculative in nature. All we can say is that with investments, no matter how careful we are, no matter how large the margin of safety we keep, we can never eliminate the risk of being wrong. 🙁
  • On the redder end of spectrum is Clariant Chemicals (India) Ltd. Though we ‘love’ this stock for its simplicity, robustness and dividends (obviously), our calculations show that it is trading 65-120% above its GN. Add to this the fact that it is currently available at a PE > 18, it can be safely deduced that shares of Clariant Chemicals are currently overvalued. (Historically, it has an average PE of 15).
  • We also observed that Banks, as a whole, seemed to be trading at levels much below their GNs (including margins of safety conditions!). To see if this was an exception or a trend, we calculated GNs for all major large cap banks.
  • The above table clearly shows that Public Sector Banks are trading at significant (40-50%) discounts to their GNs. Whereas their private sector counterparts are trading much above the GNs. We are not sure about the real reason for the same. (It may be due to PSU tag or higher growth associated with Private banks).
  • Our favorites BOB and SBI (part of DMP) are almost 48% and 23% below their GNs. But be cautioned that this should not be taken as a buy signal. There are a lot many issues like NPAs, etc which need to be looked into, before taking a call of buying into banking stocks.
  • But considering the growth possibilities (here we go again: read forecasting and speculation) that Indian banking sector has; and the role that large cap banks are about / supposed to play, wouldn’t it be an interesting idea to start accumulating units of a thematic (Banking Sector) mutual fund? We think it can be a good idea if one is ready to take the risk of taking a focused bet.
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Dividend History of Indian companies – 10 Years

We continue with our focus on dividends and dividend investing. Though dividend yields can attract an investor in short term, when investing for long term dividend income, it is important to look at the consistency with which the companies have paid dividends. We tried to find lists of Indian companies similar to ones offered in US Markets like Dividend Aristocrats, Dividend Champions (companies that have consistently raised dividends for last 10, 20 and 25 years). But sadly, such a list is not available in India free of cost. (Please let us know if you find one). This forced us to compile our own list of such companies (using a professional data source – MVXenius : Educational version). But, we could only manage to find data for last 10 years.
 
We first tabulate dividend history of stocks in our portfolio (DMP) and then move onto other known good dividend paying companies.
 
We have only tabulated data of stocks which have a current dividend yield of more than 2.4% and which we believe would continue paying out decent dividends in future.
 
Click to enlarge
 
Apart from collecting 10 year dividend data, we have also calculated average annual increase in dividends doled out in last 5 years (2nd last column).  Though ONGC is India’s largest dividend payer in absolute terms, it should be noted that it has not increased its dividend substantially in last 5 years (only 3.17%). On other hand, smaller companies like Balmer Lawrie, Clariant Chemicals (I) Ltd., Graphite India have shown amazing consistency and above average dividend growth rates (24%, 48% and 33%). But unlike ONGC, NTPC & Tata Investments Corporation, a few large caps like Bank of Baroda and BHEL have increased their dividend by an average of 28.5% & 35% respectively. You can read more about dividend policies of these companies in our previous post.
 
Apart from stocks in DMP, we also collected 10 year dividend data of a few other large companies. The data is tabulated in table below.
 
Click to enlarge
 
Though we have tried our best and adjusted dividends for bonuses and splits, we do not claim that this is an accurate list. The purpose of these lists is to share the information we collected for our personal use. At your own risk, you are free to use this in any form you may want.
 
Dead Monk’s Disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.
 
PS – Morgan Stanley recently came out with an interesting list of Dependable Indian companies. We loved reading it as it voiced our opinion that large cap stable companies are good for long term investing.

Dividend Analysis of stocks in Dead Monk’s Portfolio

We highlighted in an earlier postthat DMP would be built, primarily around dividend investing.  The core of DMP is made up of 5 stocks, namely ONGC, Clariant Chemicals (I) Ltd., Balmer Lawrie & Company, Graphite India, Tata Investment Corp Ltd. And let us confess. We did receive a few brickbats about our stock selection for forming the core of DMP. So here we would like to offer a few thoughts –
  • These 5 stocks are selected on basis of our (not your) risk appetite.
  • These stocks have been selected for long term (10+ years) and not for trading on daily or even monthly basis.
  • We do not expect these to be multibaggers. Though we would love them if they become one.
  • Selecting these 5 stocks in core does not rule out any further addition to core in future.
  • These stocks do not disturb our sleep at night.
  • We may or may not be comfortable with stocks current price.
  • We are comfortable and very happy with present dividend policy and consistency of these 5 stocks.


As you can see in above table, all 5 stocks have been consistent dividend payers for last 5 and 10 years.

But at present, multiples at which Clariant Chemicals (I) Ltd is trading are not cheap. A P/E of 17.5 is much above our liking and so is P/BV of 3.3 (Read a good analysis on Clariant at SN). As far as we are concerned, we would start accumulating once the stock comes down on these parameters. Tata Investments is primarily an investor in famous Tata companies which include cyclicals like Tata Motors and Tata Steel. Current P/E of 15.4 is not to our liking and we would rather wait before further buying.

Part from these 5, we also proposed 7 large cap stocks in DMP. Though we picked these stocks for their stability, a good and regular dividend payout can be an added advantage.


BHEL, NTPC, BOB and NHPC have quite tempting dividend yields considering the fact that initially, we picked them for their large capitalization and stability 
(Note- NHPC has not been as stable as we would have liked and has been consistently falling after its IPO. But we feel that at CMP of 18, it can be a decent bet for long term.)

As far as growth stocks are concerned (Yes Bank, Cairn India, GSPL & Sterlite Industries), we don’t expect such stocks to pay dividends (consistent or not) for a few years as they are in growth phases and would be reinvesting money in their own businesses.


Dead Monk’s Disclaimer – No matter how careful we are, as an investor, we will never be able to eliminate the risk of being wrong.

PS – Please do check ‘Stock Screenersin widget area on right side. These can be good starting points for shortlisting good stocks.

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