Pitch a tile maker on capital allocation: net cash is a fifth of its market value and it throws off steady free cash flow. Compare a buyback with new capex, and say what re-rating a commitment to return cash could bring.

The tile business trades at 13.4x against peers at 16x because the market is discounting Rs 608 crore for idle cash. Valued at 16x plus cash at face value, Shilpkala is worth about Rs 115 a share against Rs 100. A Rs 600 crore buyback lifts EPS 4.4% and return on equity to 17.8%; capex wins only if the plant earns above 7.3% after tax. The catalyst is a stated payout policy, not the cash.

Split the company in two: a tile business and a savings account. A shopkeeper with Rs 20 lakh sitting in a current account gets no credit for that money in the shop's price if buyers think he will spend it on a second shop in the wrong town. Shilpkala's Rs 4,000 crore value, less Rs 800 crore of cash, is Rs 3,200 crore for Rs 238 crore of operating profit: 13.4x, against peers at 16x. Put the other way, if the tile business deserves 16x, the market is valuing Rs 800 crore of cash at about Rs 192 crore.

Give each option a return and compare. A buyback earns the stock's own earnings yield: at Rs 100 a share and 14.3x earnings, retiring shares lifts EPS from Rs 7.00 to Rs 7.31 and return on equity from 14.0% to 17.8%. The new plant, if it earns 12% after tax, lifts EPS further, to Rs 8.01, but return on equity only to 16.0%, and only after construction and ramp-up. The breakeven is a 7.3% after-tax return: below that, the buyback wins on EPS. The real question for the pitch is whether the 12% is credible in a cyclical, crowded industry.

Because the discount is about behaviour, not arithmetic. Investors fear the cash will be spent badly, on a diversification or an overpriced acquisition. Left alone, Rs 300 crore a year of free cash flow takes the pile to about Rs 1,700 crore in three years, and the discount widens with it. A stated policy, for example returning most free cash flow each year plus a one-off buyback, removes the fear and can close part or all of the Rs 608 crore gap, up to about 15% on today's value. Closing half of it would still be worth about 8%.

One view, one number, one catalyst, one risk. The view: Shilpkala is a good business valued as a mediocre one because of its cash. The number: about Rs 115 a share with the cash valued in full, on the assumption that peers at 16x are a fair comparison. The catalyst: a payout policy, which you would ask management about directly. The risk: management spends the cash on an acquisition at a high price, which would confirm the market's discount rather than close it. Say too that 16x for peers could itself be generous at the top of a housing cycle.