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Strong recovery across segments ex Healthcare

All segments of 3M India except Healthcare reported strong recovery in Q4FY21 Key reasons were (1) revival in automotive, infrastructure and construction sector, (2) better consumer off-take primarily in Home care products and (3) favorable base. Due to lower capacity utilization in hospitals and postponement of elective surgeries, Healthcare segment reported revenue growth of just 5.8% YoY. While closure of automotive graphics business resulted ~500bps revenue impact, EBITDA margin expanded 100bps with better revenue mix.

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 of FY21. 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 global relationships with large manufacturers and (3) access to parent’s technology pool. Maintain ADD with a DCF-based TP of Rs26,900 (earlier TP: Rs23,000).

* Q4FY21 result: 3M India reported revenue, EBITDA and PAT growth of 22.9%, 34.2% and 17.2%, respectively YoY. Its revenue growth adjusting for closure of automotive Graphics (4-5% of revenues) was ~29%. EBITDA margin was up 100bps due to better revenue mix and cost saving measures. Standalone revenues were up 22.6% and revenues of 3M Electro (Consolidated – Standalone) were up ~26% YoY.

* Segment-wise performance: Consumer segment reported 33.5% revenue growth. We believe Home care portfolio would have reported healthy growth vs office stationery products like Post it notes. Safety & industrial segment reported revenue growth of 24.3% with revival in construction and infrastructure activity. With revival in Auto sector, the revenues of Transportation & Electronics segment were up 26.1% YoY. Due to lower capacity utilization in hospitals, there is lower off-take of medical consumables which resulted in just 5.8% revenue growth of Healthcare segment.

* Impact of covid wave-2: We believe the company would have maintained similar growth momentum in Apr’21. However, we expect severe revenue impact due to localized lockdown in May’21. Slower recovery of Automotive, Infrastructure, and Healthcare segments would impact company’s revenue growth rates.

* Higher input prices but stable currency: While the increase in input prices may increase cost pressures, we believe stable USD-INR rates would provide some stability to margins. Considering the slow-down, we expect some impact on pricing power of 3M India at-least in near term.

* 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 (Earlier TP-Rs23,000). Key risks: Prolonged weakness in economy and failure of new products.

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