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Capacity expansion may reduce procurement dependence from parent

3M India’s FY22 annual report highlights the following: (1) Company is expanding its local manufacturing capacity for respirators, masks, hand sanitisers, etc; it will also supply industry consumables to mobile phone manufacturing companies availing the PLI schemes. (2) 3M India is steadily investing in increasing its offline and online reach for Scotch Brite. (3) It introduced four products in automotive and consumer segments. We expect launch of additional products in tandem with normalisation of the economy. (4) Royalty as a percentage of sales reduced from 5.3% in FY21 to 5.2% in FY22. We remain positive on 3M India due to its competitive advantages such as: (1) strong brands, (2) established distribution network, and global relationships with large manufacturers, and (3) access to parent’s technology pool. Maintain BUY with a DCF-based target price of Rs26,500 (implied P/E 56x FY24E EPS). 

* Highlights from chairman’s speech: (1) Company is a net beneficiary of rising infrastructure expenditure on roads and highways in India; (2) it has launched multiple new products and solutions to meet new emerging demands; and (3) it has partnered with several medical bodies to upskill their paramedical staff and upgrade their clinical practices.

* Increasing local manufacturing prowess: 3M India is expanding its manufacturing capacity for respirators and masks, to meet the rising demand. It has also completed a manufacturing project for hand sanitisers and disinfectants. Company will supply materials to mobile phone makers investing under the PLI schemes. We expect increase in localised production to lead to reduction in 3M India’s procurement of raw materials from related parties.

* Steady launch of new products: During the year, 3M India introduced two new products in the automotive segment (paint spray gun and ceramic coating). It also launched star-marked tape for all-weather reflectivity and a consumer respirator for protection with comfort. We expect the number of new launches to increase with normalisation of the economy.

* Reduction in adspend and working capital: 3M India’s adspend as a percentage of net sales fell from 2.0% in FY21 to 1.6% in FY22 due to the impact of covid. Net working capital days also reduced YoY to 38. However, we model both adspend and working capital days to increase to pre-pandemic levels in FY23E-FY24E.

* Maintain BUY: We model 3M India to report revenue and PAT CAGRs of 16.6% and 39.4% respectively over FY22-FY24E with steady improvement in RoE. Maintain BUY with a DCF-based target price of Rs26,500. Key risks: prolonged weakness in the economy, and failure of new products.

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