18 proven free cash flow generators down up to 50%. Should you buy?

— Alfred Rappaport, economist and author

From Warren Buffett to Saurabh Mukherjea — a whole gamut of money managers say if you want a stock that can create wealth for you in the long term, look at how efficient it is in creating free cash flows.

Free cash flow or FCF basically refers to the cash left over after a company pays for its operating expenses (opex) and capital expenditures (capex). A company can simply use the free cash to plan its future growth or distribute among its shareholders, in many cases do both.

Having extra cash lying there also helps companies deal with contingencies, for instance something like the pandemic and subsequent lockdown that dried up sources of revenue for many companies for months.

So what are the companies that have grown their free cash flows at an explosive rate?

We analysed the free cash flow trend during FY19-21 (FY22 data was not updated for all companies) of BSE-listed firms with market cap of more than Rs 1,000 crore. We also excluded banking, financial services and insurance companies from our analysis.

We found 18 companies that have seen their free cash flows growing at more than 20 percent rate for the this period. They include companies from various segments of the Indian economy such as IT, commodities, pharma and chemicals.

Not surprisingly many of them have delivered multibagger returns in the last five years, including Mastek, JB Chemicals, Astral, Astrazeneca, Jindal Steel & Power, Asian Paints, HCL Tech and Welspun India. Share India Securities, part of the list but not listed five years back, is also a multibagger.

If we go by analysts tracking these companies, most of them will keep making money for their investors. Year to date, some stocks like Welspun India have fallen by nearly half, thus valuation of some of the names may be in reasonable range.

Mukherjea, who runs a number of popular PMS funds, remains steadfast in his opinion towards Asian Paints thanks to its ability to generate cash. This is even as it is facing headwinds in terms of higher raw material prices.

The stock is down about 18 per cent in the current year, and he recently said on a news channel that his team is buying the stock at every dip. Many other analysts also believe this is one stock to hold for the long term.