3M India - CY21 guidance of parent: Focus on healthy revenue growth and FCF, but limited capex - ICICI Securities

3M USA (3M India's parent) announced its guidance (link) for CY21 as (1) sales growth of 5-8%, (2) EPS growth of 5-11% indicating margin expansion and (3) FCF conversion of 95-105%. It also plans to invest in markets with strong and sustainable demand in segments such as personal safety, healthcare, auto OEM, semiconductor, data center and home improvement. Likely implications for 3M India: (1) As 3M India offers healthy growth in most of the above mentioned areas, we believe 3M USA may invest in R&D, technology and new products in India, (2) 3M India is likely to report strong revenue growth in CY20 with margin expansion considering favourable base of CY20 which was impacted by covid and (3) considering PLI schemes, consensus expectation was higher capex by 3M India. However, as the parent has high focus on FCF conversion, it may result in lower-than-expected capex by 3M India. We remain positive on 3M India due to competitive advantages like (1) strong brands, (2) established distribution network and (3) access to technology pool of the parent. Maintain ADD with a DCF-based TP of Rs21,800 (59x FY23E).

- CY21 guidance announcement by 3M USA: 3M USA has announced CY21 guidance as (1) sales growth of 5-8%, (2) EPS of US$9.2-US$9.7. It indicates EPS growth of 5-11% indicating margin expansion, (3) capex of US$1.8bn-US$2bn and (4) FCF conversion of 95-105%.

- Likely implications for 3M India: The company is also expected to focus on EBITDA margin expansion in CY21. As CY20 was impacted by covid, we believe it will be able to report EBITDA margin expansion in CY21. Considering high focus on FCF conversion by the parent, we believe there may not be any major capex in India, too.

- Requirement of capex to tap PLI opportunity: We believe 3M India needs to invest in local manufacturing units to cater to likely increase in domestic manufacturing activity post PLI announcements. Early capex by 3M India will allow it to gain market share as well as improve margins.

- Focus on investments in end markets with strong demand: 3M USA plans to invest in markets where demand is strong and sustainable. It plans to invest in personal safety, healthcare, auto OEM, semiconductor, data center and home improvement segments. We believe as India offers strong and sustainable growth (CY1995-2020 revenue CAGR: 18.7%) in most of these segments, 3M USA may invest more in new products, services, R&D and technology in India.

- Maintain ADD: We model 3M India to report revenue and PAT CAGRs of 15.7% and 40.1%, respectively, over FY21-FY23E. RoE is also expected to remain above the cost of capital over the same timeframe. We maintain our ADD rating on the stock with DCF-based target price of Rs21,800 (59x FY23E). Key risks: Failure of new products and prolonged slowdown in the economy.

Shares of 3M INDIA LTD. was last trading in BSE at Rs.19814.05 as compared to the previous close of Rs. 20033.65. The total number of shares traded during the day was 215 in over 129 trades.

The stock hit an intraday high of Rs. 20050 and intraday low of 19809. The net turnover during the day was Rs. 4276398.

Source : Equity Bulls

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