Analysis of cash cows

Q&A: Questions & Answers
1

While researching ‘Hindustan Zinc’ I came across the following.

The Cumulative Free Cash Flow till now is around 32,359 CR. Dividing by the number of outstanding shares,
this comes to approx Rs 75 per share.
The CMP is around Rs. 240. (P/E ~ 12 )

Let’s say the company has been growing at a more or less avg of 10% YOY.

At a higher level at least, How do we analyse this scenario?

Because of the excess cash, the share can be bought at a discount of Rs. 75 @Rs 165? Which brings down the P/E from 12 to 8.25?

OR

What is the company doing with so much idle cash? Is it not able to utilise it for further expansion? Has it reached a stagnancy?

2

Have not studies Hindustan Zinc, One thing i would like to mention is never buy cyclical’s by looking into the PE ratio.

3

Thanks but my doubt is regarding the cash situation and how to analyze it. Can you help wrt it?

4

The way i would look at this is that from the past years trend the free cash flow after all investing and financing is nearly zero. So the only component that is being taken out is through dividends which is at present giving a yield of 11.45%.

The profits are nearly stagnant since last 3 years so dont expect it to improve further. If it improves that will be a bonus.

So the question is are you willing to invest your money to get a yield of 11.45% with a risk that the compnay profits may go down in future when you can get a risk free return of 7.5-8% in FD/ Government bonds?

This is my view of the situation and i may be wrong.

Also is the amount of FCF of 32,359 Cr is based on previous 5 year results? I am seeing only 51 cr cash in screener. and last year FCF as 0.86 cr.

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5

It is for 10 years. Solely adding (CFO - CAPEX).

I get your point.

Although I would add, even though there is no accelerated growth,
the CFO has been increasing at around 10 % for the past 3 years.

Even with a constant P/E, the price should keep on agreeing with the cash earnings at the basic level.

So one not only has a direct dividend yield of 11.45% but also the price appreciation of approx 10 % in the long term.