IGI Logo

PLI remains medium-term growth opportunity

We interacted with senior management of 3M India and takeaways from the discussion are (1) the company plans consolidation of its two plants in Pune which will result in higher production efficiencies and lower overheads, (2) It believes PLI is strong medium-term opportunity and it is in discussion with Government and manufacturers to offer its products/services related to PLI, (3) Healthcare segment is still impacted due to lower elective surgeries and lower demand for dental care products, (4) The commercial production of automotive products is expected to commence from Q1FY23. However, closure of ‘Printed graphics’ business will result in 4% lower revenues, (5) E-commerce contribution is in low single digits and (6) 3M India follows global manufacturing map of its parent and will continue to service Indian customers via either imports, last mile manufacturing or complete manufacturing in India. We remain positive on 3M India due to competitive advantages like (1) strong brands, (2) established distribution network, (3) global relationships with large manufacturers and (4) access to parent’s technology pool. Maintain ADD with a DCF based TP of Rs26,900.

Consolidation of production units to drive efficiency benefits:

3M India plans to shift most production facilities from Pimpri, Pune to Ranjangaon, Pune plant. It will help to drive efficiencies and reduce overheads. We model this restructuring to result in margin expansion from H2FY23 onwards.

PLI- Medium term opportunity:

The company has indicated that it is in touch with the Government as well as manufacturers regarding PLI announcements and believe increase in manufacturing activities to be medium-term positive opportunity for 3M India. Initially it will import the products or it may do last mile manufacturing in India.

Healthcare business is still impacted by lockdown:

Healthcare business is impacted by (1) lower elective surgeries. 3M India supplies consumables used in hospitals. Due to lower elective surgeries, there is lower demand and (2) lower demand for dental care products.

Update on capex for automotive plant:

3M India plans to commence production of some automotive products in Ranjangaon, Pune plant. While there is some delay in rollout of plant, the company expects test production to commence in Q4FY22 and commercial production by Q1FY23.

E-commerce contribution is in low single digits:

While there is strong growth in revenues from E-commerce, the revenue contribution of E-commerce is still in low single digits. There is steady recovery in revenues from general and modern trade.

Segment-wise local manufacturing:

3M India follows global manufacturing map of its parent 3M USA. The parent manufactures products globally depending on scale and cost structure. As of now 3M India manufactures multiple products in Transportation and Electronics segment. It also manufactures many products from Safety and Industrials segment. However, its local manufacturing is lowest in Healthcare segment.

Key customer segments:

3M India’s key customers are from 6-7 major sectors such as (1) Infrastructure, (2) Manufacturing, (3) Automotive, (4) Automotive after markets, (5) Healthcare, (6) Consumer and (7) Utilities. The company believes there is strong potential for revival in revenues of Healthcare considering it is still operating at pre-pandemic levels.

Volatility in consumer behavior and demand for facemasks and sanitizers:

The demand for hand sanitizers and masks increased rapidly post commencement of pandemic. However, with reduction in restrictions, the demand for these products has slowed down. The company expects the demand for these products to settle at lower levels than FY21 but higher than pre-pandemic levels.

Focus on franchisee profitability:

Due to pandemic and lockdowns, there is some impact on financial conditions of some franchisee partners. However, the company believes the profitability and financial condition of its partners is extremely important. It plans additional products/services which can offer higher value to consumers and increase profitability of franchisee partners.

Printed graphics business closure:

The company has discontinued its ‘Printed Graphics’ business which used to contribute <5% of revenues. However, as this business was generating negligible profits/ losses, we expect the profitability margins to expand.

Maintain ADD:

We model 3M India to report revenue and PAT CAGR of 18% and 53%, respectively over FY21-FY23E with steady improvement in RoE over FY21- 23E. We retain ADD with a DCF-based target price of Rs26,900. Key risks: Prolonged weakness in economy and failure of new products.

To Read Complete Report & Disclaimer Click Here

For More ICICI Securities Disclaimer https://www.icicisecurities.com/AboutUs.aspx?About=7

Above views are of the author and not of the website kindly read disclaimer