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If you are currently a shareholder in Pidilite Industries Limited (NSE:PIDILITIND), or considering investing in the stock, you need to examine how the business generates cash, and how it is reinvested. This difference directly flows down to how much the stock is worth. Operating in the diversified chemicals industry, PIDILITIND is currently valued at ₹489.1b. Today we will examine PIDILITIND’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.
View our latest analysis for Pidilite Industries
Is Pidilite Industries generating enough cash?
Pidilite Industries 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 Pidilite Industries’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
Along with a positive operating cash flow, Pidilite Industries also generates a positive free cash flow. However, the yield of 1% is not sufficient to compensate for the level of risk investors are taking on. This is because Pidilite Industries’s yield is well-below the market yield, in addition to serving higher risk compared to the well-diversified market index.
Does Pidilite Industries have a favourable cash flow trend?
Another important consideration is whether this return is likely to be maintained over the next couple of years. We can gauge this by looking at PIDILITIND’s expected operating cash flows. In the next couple of years, the company is expected to grow its cash from operations at a double-digit rate of 56%, ramping up from its current levels of ₹8.0b to ₹12.5b in two years’ time. Although this seems impressive, breaking down into year-on-year growth rates, PIDILITIND’s operating cash flow growth is expected to decline from a rate of 39% next year, to 12% in the following year. However the overall picture seems encouraging, should capital expenditure levels maintain at an appropriate level.
Next Steps:
The company’s low yield relative to the market index means you are taking on more risk holding the single-stock Pidilite Industries as opposed to the diversified market portfolio, and being compensated for less. Though the high operating cash flow growth in the future could change this. Now you know to keep cash flows in mind, I suggest you continue to research Pidilite Industries to get a more holistic view of the company by looking at: