After going through Benjamin Graham’s “The Intelligent Investor” we wanted to try out the principles learnt on a real life company. Benjamin Graham has proposed some preliminary qualitative checks for the company, such as
- There should be a strong brand
- Business should be easy to understand
- Should be a near-monopoly
- Managers are realistic and have achieved past targets
- Belief in organic growth rather than mergers and acquisitions
- Low managerial remuneration and stock options
Coal India Limited seemed like the right company to take for the next stage of analysis. So we took the company through some of Graham’s basic checks
Current Ratio >= 2
Coal India has maintained a current ratio above 2 only in 1 of the last 5 years, and that was 5 years ago! So a poor start. Verdict – FAIL.
Long Term Debt <= Net Current Assets
Debt-Equity Ratio < 0.5
Coal India operates on very low debt levels. The total borrowings of the company stood at Rs. 2 kCr as of 31 Mar 2021. The total cash, cash equivalents and other bank balances stood over Rs. 28 kCr. The NCA were 18 times higher than the LTD. Verdict – PASS.
Again, the debt to equity ratio as of 31 Mar 2021 was at 0.06. Debt is not a problem for Coal India. Verdict – PASS.
PAT > 0 for the last 10 years
Dividend > 0 for last 20 years
Coal India has been consistently profitable for the last 10 years. Verdict – PASS.
Also, the Company has paid dividends for the last 10 years. Verdict – PASS.
3 year average EPS growth should be 33% over last 10 years
Graham does well for not depending on figures for a single year, which may be a rare year. Rather, Graham always asks you to focus on averages across large periods of times. Especially when he asks you to calculate growth. YoY growth is not as important as growth in 3 year or 5 year averages. In the case of Coal India, the 3 year average EPS growth over the last 10 years was 63% (logarithmic growth). Verdict – PASS.
PE Ratio < 15
Graham is mindful that some industries hold a high PE and some have a naturally low PE. However, according to him no industry should have a PE < 15. Coal India has held a PE < 15 for the last 2 years. Before that the PE stood higher for 3 years. Verdict – PASS.
NW <= MV <= 1.5 NW
Graham acknowledges that the market value should be higher than the book value, considering the future value of the operating assets. However, the PB should not be over 1.5 for any company lest they be overpriced. Here, Coal India’s market value is 2.6 times the book value. Verdict – NEUTRAL.
MV >= Net Current Assets
The market cap of Coal India stands at 2.5 times the Net Current Assets. Verdict – PASS.
Finance costs <= (1/5) PBT
Finance costs <= (1/2.9) PAT
The debt and consequently the finance costs of Coal India are low enough to easily pass this test. Verdict – PASS.
RoE > 20% in 10 years average
RoE > 15% every year for last 10 years
The average RoE has been 46% in the last 5 years and higher than 35% every year for the last 5 years. Verdict – PASS.
Promoter holding >= 20%
Government of India, the promoter of Coal India, holds 66% in the company. Verdict – PASS.
ICSR > 2
The interest coverage service ratio stands comfortably at 49 times and has never been less than 26 in the last 5 years. Verdict – PASS.
This is enough to spark an initial interest in Coal India. This is further increased when we look at the average PB ratio of the company for the last 5 years which is much higher than the present PB ratio for the company. That is in a highly optimistic market of early January 2021 where the indices are reaching new peaks every day.
Finally, the total assets of the company are Rs. 150 kCr. The provisions held by the company are of Rs. 60 kCr out of which Rs. 47 kCr consists of “Stripping Activity Adjustment”. This is a non-payable liability and is incurred as an expense over the regular course of business.
This shows that the company operates on a tight working capital but otherwise is technically and financially extremely sound and might be looking at great returns for its investors in the future.
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