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Recovery visible in most segments

Key takeaways from 3M India’s Q3FY21 earnings: (1) There is recovery in consumer and Transportation & Electronics segment with re-opening up of the economy and automotive sector, (2) Healthcare segment continues to be impacted by lower off-take by hospitals and (3) though gross margin was flat, cost-saving initiatives resulted in EBITDA margin expansion of 370bps. We model the business to maintain recovery momentum in FY22 due to re-opening of economy especially auto, oil & gas and healthcare sectors and favorable base. Increase in manufacturing activities in India due to PLI will be medium term positive for 3M India. We remain positive on 3M India due to competitive advantages like (1) strong brands, (2) established distribution network, and (3) access to parent’s technology pool. Maintain ADD with a DCF-based TP of Rs23,000 (60x FY23E; earlier TP: Rs21,800).

* Q3FY21 result: 3M India reported revenue decline of 0.5% in Q3FY21 but EBITDA and PAT reported growth of 27.4% and 17.3% YoY. Though there is deterioration in revenue mix, the gross margin was stable YoY. EBITDA margin expanded 370bps due to cost saving initiatives. We believe the company has accounted for some VRS expenses even in Q3FY21. Standalone revenue declined 1.5% indicating revenue growth of 12.4% for 3M Electro.

* Segment-wise performance: Safety & industrial segment reported revenue decline of 1.2%. We believe cap on pricing of masks in some states would have impacted revenues of Safety & Industrial segment. Due to lower capacity utilization in hospitals, there is lower off-take of medical consumables which resulted in 23.2% revenue decline in Healthcare segment. Consumer segment reported 9.6% growth with recovery in economy. Due to recovery in automotive sector, there is 7.3% revenue growth in Transportation & Electronics segment.

* Closure of automotive graphics business to hurt revenue growth: The company has discontinued its automotive graphics business (less than 5% of sales) with effect from Nov’2020. It was part of Transportation and electronics segment. We believe there will be impact on revenues from Q4FY21 onwards. Pending orders and inventory of Automotive graphics would have driven some revenues in Q3FY21.

* Expect strong recovery FY22 onwards: We model 3M India to report strong recovery with re-opening of the economy and favorable base. Key industries consuming 3M India’s products are auto, oil & gas and healthcare. We expect 3M India to benefit with recovery in these three sectors.

* Maintain ADD: We model 3M India to report PAT CAGR of 43% over FY21E-FY23E with RoE higher than the cost of capital. We retain ADD with a DCF-based target price of Rs23,000 (implied P/E 60x FY23E). Key risks: Prolonged weakness in economy and failure of new products

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