How to Apply Graham's Principles to Indian Companies

You open the screener at 11 PM, type in a famous Indian company, and the data scrolls down — debt, earnings, cash flow, valuation. The next decision is yours, and it will shape your portfolio for years. To apply Graham's principles to Indian companies, you do not need new tools. You need to apply seven specific filters in the right order. Most of those filters were written in the 1940s and still work in 2026.

Why Graham's framework still works in India

Benjamin Graham's value investing principles were built for a market that crashed, recovered, and crashed again — exactly the kind of market most emerging economies, including India, run through. Graham did not promise growth. He promised survival. Apply his rules to Indian companies and you reduce permanent loss of capital, even when you give up some upside in raging bull runs.

The core idea is simple. Buy a company for less than what it is worth, with a margin of safety, and only when the underlying business is solid enough to recover from setbacks.

Step 1: Filter for size and stability

Graham insisted on companies large enough to weather sector downturns. For Indian markets, set a minimum revenue floor of 1,000 crore rupees and a minimum market capitalisation of 5,000 crore rupees. Anything smaller is acceptable but only if you understand the business intimately and have done deep ground research.

Avoid micro-caps for value-investing screens. Liquidity, governance, and disclosure quality drop sharply below the small-cap line.

Step 2: Demand a strong financial position

The classic Graham metric — the current ratio — should sit above 2 for industrial firms. For Indian companies, also check three additional measures.

1. Debt to equity below 0.5 for non-financial businesses.
2. Interest coverage ratio above 5, meaning earnings cover interest costs at least five times.
3. Positive operating cash flow for the past three consecutive years, ideally five.

The Indian market punishes leverage harder than the US market because credit cycles are sharper and bank willingness to roll debt vanishes quickly during stress.

Step 3: Insist on consistent earnings

Graham wanted positive earnings every year for a decade. In India, ten years of profitable history is a tall bar. Settle for at least seven of the last ten years showing positive net profit, with no two consecutive loss years. This filter alone removes most cyclical traps and weak business models.

Avoid companies whose ten-year earnings show one or two huge spikes followed by long flat periods. Sustainable earnings beat dramatic earnings every time.

Step 4: Look for a real dividend record

Graham's framework treats dividends as proof that earnings are real. Companies cannot pay cash dividends out of accounting fiction. Set a minimum threshold of uninterrupted dividends for at least the past 10 years.

Many Indian companies pay tiny token dividends to maintain the streak. Look beyond the streak. A consistently rising dividend payout, alongside growing earnings, is a much stronger signal than a flat dividend history.

Step 5: Apply the earnings growth screen

Graham allowed a company onto his list only if earnings per share had grown by at least one-third over the past decade. For Indian companies, target compound EPS growth of at least 7 to 8 percent over ten years. Below that, the business is barely keeping up with inflation. Above 12 percent is genuinely strong.

Strip out one-off gains and exceptional items before measuring growth. The reported EPS often hides the real operating trend.

Step 6: Demand a moderate price-to-earnings ratio

Graham wanted the price-to-earnings ratio under 15 times trailing earnings. For Indian markets, adjust this slightly upward to under 20 times trailing earnings, or under 15 times forward consensus earnings. Stricter than this excludes too many quality businesses; looser than this dilutes the value-investing edge.

Use a 5-year average earnings denominator if the company is cyclical. A single peak-cycle year flatters the multiple and tricks you into buying at the top.

Step 7: Apply the Graham number for valuation sanity

Graham proposed a quick formula. Multiply the price-to-earnings by the price-to-book ratio. The product should be no greater than 22.5. So a P/E of 15 with a P/B of 1.5 gives a product of 22.5 — the upper limit. A P/E of 10 with a P/B of 2 gives 20, which is acceptable.

The Graham number is not a precise valuation. It is a sanity check that filters out anything obviously expensive on both earnings and asset measures simultaneously.

Common mistakes when applying Graham to Indian companies

• Mechanical screening only. Graham insisted on understanding the business after the screen, not before.
• Ignoring promoter behaviour. Heavy pledged shareholding, related-party transactions, and frequent changes of auditor are red flags Graham would have flagged immediately.
• Treating PSU companies as automatic value because their multiples look low. Many remain low-multiple for structural reasons.
• Using one year of data instead of ten. Graham's framework explicitly resists short-term thinking.

Tips that improve the Graham approach in Indian markets

• Cross-check screening results with annual reports for the last three years. Promoters often disclose more in the annual report than in any quarterly summary.
• Compare each candidate against three peers in the same sector. Cheapness is relative.
• Build a small basket of 8 to 12 names rather than concentrating in two or three. Graham himself favoured diversification within value.
• Set a review schedule. Once a quarter, recheck whether the original thesis still holds. Sell quickly when it does not.

For verified company filings, the Securities and Exchange Board of India hosts a public database at SEBI covering quarterly results, shareholding patterns, and material disclosures.

Frequently asked questions about Graham's principles in India

Are Graham's principles still relevant in modern Indian markets?

Yes. The principles handle drawdowns, debt cycles, and earnings traps remarkably well. Modify thresholds for inflation and Indian sector realities, but keep the core framework intact.

Which Indian sectors fit Graham's principles best?

Mature industrial firms, consumer staples, and selected utilities fit naturally. Banks and high-growth technology firms need adapted measures because Graham's metrics were not built for them.

How many Graham-style stocks should I hold at once?

Graham himself favoured 10 to 30 stocks. For Indian retail investors, 8 to 15 names balance diversification with the time required to monitor each holding.

What is the biggest risk of value investing in India?

Value traps — companies that look cheap because the market knows something you do not. Strict quality filters and ongoing reading of disclosures reduce, but never eliminate, this risk.