Graphite India Limited - Fundamental Analysis and Intrinsic Value Calculation

In this post, let's analyse the basic parameters of Graphite India Limited. We will be analysing the company using three different methods which can get us clarity about the company.

The first method will be to check the financial strength and other key parameters of the company. We named this ‘Graham Method’. These criteria have been derived from the great Benjamin Graham, the author of Intelligent Investor. These criteria can give clarity whether it is fruitful for us to consider the stock for valuation.

Values are as of 2019

Graham Checklist:

In the first of the Graham’s method, which is called Net-Net by him, we won’t mostly find many companies. The method that suits today’s world will be the second one. Below are these parameters for Graphite India Limited.

Graham Stock pick method		Values	Check
Method 1
One check pick	1. Current market price less than 67% of the Net current assets 2. Net current assets = (Current assets – Total Liabilities) / Number of outstanding shares
	Current Price	181.30	NO
	Fixed Assets	1,358
	Current Assets	4,224
	Fixed Liabilities	85
	Current Liabilities	943
	Total number of shares	16.00
	Check Value	133.83
Method 2
1. Size of the company	Sales at least more than 200 crores.
	Latest Annual Sales	3,093	YES
2. Strong financial stability	1. Current assets must be at least twice current liabilities 2. Long term or Fixed liabilities must be less than net current assets (Current assets – current liabilities)
	Fixed Assets	1,358
	Current Assets	4,224	1. YES
	Current Liabilities	943
	Fixed Liabilities	85	2. YES
3. Earnings Stability	Should have positive earnings for past 10 years at least. May be we can reduce this to 5 years for Indian market		YES
4. Dividend record	Should have paid dividend for last 10 years uninterrupted. May be we can reduce this to 5 years for Indian market		YES
5. Earnings Growth	Average earnings should have increased by at least 30%. We can increase it to 100% to be on safe side
	Current Earnings	3.67	NO
	Earnings before 10 years	13.25
	Check Value	-72.33%
Financial Ratios
6. Moderate Price/Earnings Ratio	PE ratio should be at least less than 14 (which means at least 7% return)		49.45
7. Moderate Ratio of Price to Assets	PB ratio should be less than 1.5 or may be 2		0.64
9. Moderate Ratio of Debt to Equity	Debt to Equity ratio should be less than 1		0.23
10. Moderate Return on Equity	At least 20 %		1.29%
11. Moderate Return on Total Assets	At least 15 %		1.05%
12. Moderate Earnings growth rate	At least 15 %		-12.06%

Asset Based calculation method:

Next is called the Asset based calculation. In this we consider the last four financial year earnings to average them and arrive at a reasonable earning capacity of the company. Then we calculate how much is needed to earn that cash flow at a nominal 7% interest rate. This forms one part. The next is net cash in hand. That is calculated by subtracting the total liabilities from financials assets in hand because they are the highly liquid form of asset. The same is given below for Graphite India Limited.

Earnings calculation
Income from operations	3,267
- Expenses	3,241
Income before tax	26
- Tax	9
Income after tax	17
+ Depreciation and Amortization
+ Profit from associates and Joint ventures
- Maintanence Capital expenditure
Distributable cash flow	17
Excess Cash Calculation
+ Fixed financial assets
	Investments	655
	Other financial assets	0
+ Current financial assets
	Investments	1,411
	Cash and Cash eq	363
	Bank balance	92
	Other financial assets	49
- Total debt
	Fixed liabilities	85
	Current liabilities	943
	Total	1,542
Investment needed @	Capital needed	+ excess cash	Per share value
7.50%	229	1,771	110.68

Buffett method:

The last method is called the Buffet Method. We named this method as such because we consider how the great Warren Buffett assesses a company before buying. We calculate the free cash flow by starting at the net income, adding the depreciation, subtracting the borrowings (spanned across 10 years) and the average capital expense over last four years. With this when we estimate the future cash flow for the company for next 10 years and find out the current value for it, we can attain an intrinsic value using this method. For Graphite India Limited, it is as given below.

Graphite India Limited
Current Market Price	181.30
4 year average profit	3.67
4 year average D&A	3.28
4 year average capital expense	3.63
Borrowings deduction	2.59
Free cash flow every year	0.73
Earnings in first 3 years	13.25
Earnings in recent 3 years	3.67
Earnings growth in 10 years	0.28
Profit after 10 years	1.01
Value after 10 years	14.21
Year	Current value of money
1	0.68
2	0.63
3	0.59
4	0.55
5	0.51
6	0.47
7	0.44
8	0.41
9	0.38
10	7.23
Current Value:	11.87

To check the intrinsic value and complete fundamental analysis, please see the video below

https://youtu.be/8Zj_znDYJhU

Disclaimer: We are not SEBI approved Research Analyst or Investment Advisors. Please don't buy based only on our analysis. Do consult your financial advisor before investing.