3M India - Long-term value generator passing through short-term weakness - ICICI Securities

Post our initiating coverage report on 3M India, few investors had raised queries on the slow growth registered by the company over FY19-FY21E. While there are obvious reasons for weakness - such as (1) slowdown in GDP growth, (2) Covid-led lockdown and (3) slowdown in the auto sector - we would like to draw investor attention towards long-term value creation by the company. 3M India reported revenue and PAT CAGRs of 19% and 22% respectively over the long period of FY1995-FY2020 maintaining RoE > cost of capital. Average RoE (adjusted for excess cash and other income) stood at 38% over the stated period. Company has remained EVA-positive in all the years of past two decades except FY13-FY14. Stock price has compounded at a CAGR of 22% over Apr'01 to Oct'20. We remain positive on 3M India due to moats like (1) strong brands, (2) established distribution network, and (3) access to parent's technology pool. Maintain ADD and with a DCF-based target price of Rs20,000 (55x FY23E).

- Revenue growth pegged at 1.1x nominal GDP growth: 3M India's revenues have grown at a CAGR of 18.7% over FY95-FY20 and has remained at 1.1x nominal GDP growth. We believe a similar trend is likely to continue over next decade.

- Negligible volatility in gross margins: While currency fluctuations can impact 3M India's quarterly margins, we note its average gross margin over FY1995-FY2020 was 41.6% with a coefficient of variation (standard deviation/mean) of just 9.8%. Despite volatile INR-USD rates and steady INR depreciation at ~3% per annum, 3M India has maintained its gross margins, which indicate its strong pricing power.

- Net profit CAGR of 22% over FY1995-FY2020: 3M India's earnings have grown at a CAGR of 22% over the stated period. Company has funded its entire growth through internal accruals and has not resorted to equity/debt funding. It has also created a cash reserve of Rs7.8bn as at FY20-end.

- Strong EVA creation over FY1995-FY2020: It has also generated strong EVA by maintaining return ratios above the cost of equity. Except in FY13 and FY14, it has been EVA-positive over past two decades. It has also developed competitive advantages such as strong brands and distribution network over the period.

- Maintain ADD: We model 3M India to report revenue and PAT CAGRs of 4.8% and 8.2% respectively, over FY20-FY23E. RoE too is expected to remain above the cost of capital over the same timeframe. We maintain ADD on the stock with a DCF-based target price of Rs20,000 (55x FY23E). Key risks are: failure of new products and prolonged slowdown in the economy.

Shares of 3M INDIA LTD. was last trading in BSE at Rs.18750 as compared to the previous close of Rs. 18686.2. The total number of shares traded during the day was 34 in over 12 trades.

The stock hit an intraday high of Rs. 18750 and intraday low of 18580. The net turnover during the day was Rs. 635167.

Source : Equity Bulls

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