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Hindustan Unilever Limited (NSE:HINDUNILVR) shareholders, and potential investors, need to understand how much cash the business makes from its core operational activities, as well as how much is invested back into the business. This difference directly flows down to how much the stock is worth. Operating in the household products industry, HINDUNILVR is currently valued at ₹3.4t. Today we will examine HINDUNILVR’s ability to generate cash flows, as well as the level of capital expenditure it is expected to incur over the next couple of years, which will result in how much money goes to you.
Check out our latest analysis for Hindustan Unilever
What is Hindustan Unilever’s cash yield?
Hindustan Unilever generates cash through its day-to-day business, which needs to be reinvested into the company in order for it to continue operating. What remains after this expenditure, is known as its free cash flow, or FCF, for short.
There are two methods I will use to evaluate the quality of Hindustan Unilever’s FCF: firstly, I will measure its FCF yield relative to the market index yield; secondly, I will examine whether its operating cash flow will continue to grow into the future, which will give us a sense of sustainability.
Free Cash Flow = Operating Cash Flows – Net Capital Expenditure
Free Cash Flow Yield = Free Cash Flow / Enterprise Value
where Enterprise Value = Market Capitalisation + Net Debt
Hindustan Unilever’s yield of 1.43% indicates its sub-standard capacity to generate cash, compared to the stock market index as a whole, accounting for the size differential. This means investors are taking on more concentrated risk on Hindustan Unilever but are not being adequately rewarded for doing so.
What’s the cash flow outlook for Hindustan Unilever?
Can HINDUNILVR improve its operating cash production in the future? Let’s take a quick look at the cash flow trend the company is expected to deliver over time. Over the next couple years, the company is expected to grow its cash from operations at a double-digit rate of 60%, ramping up from its current levels of ₹60.6b to ₹97.0b in three years’ time. Furthermore, breaking down growth into a year on year basis, HINDUNILVR is able to increase its growth rate each year, from 11% in the upcoming year, to 18% by the end of the third year. The overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
Low free cash flow yield means you are not currently well-compensated for the risk you’re taking on by holding onto Hindustan Unilever relative to a well-diversified market index. However, the high growth in operating cash flow may change the tides in the future. Now you know to keep cash flows in mind, I suggest you continue to research Hindustan Unilever to get a more holistic view of the company by looking at: