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Strong dividend payout to improve RoCE without affecting ability to invest in capex

3M India has announced its first-ever dividend (Rs850/share), which is the key highlight of Q2FY23 result. The payout will result in cash outflow of Rs9.75bn, but the company still has enough cash on books (~Rs4bn) to invest in any large capex. It also generates OCF > Rs3bn each year. Revenue of 3M grew 16.3% YoY, led by strong numbers across all segments. Amidst input material inflation, supply-chain challenges and INR depreciation, timely price hikes and other costsaving initiatives helped 3M India expand EBITDA margin by 161bps YoY. We remain positive on 3M India led by competitive advantages like (1) strong brands, (2) established distribution network and global relationships with large manufacturers, and (3) access to parent’s technology pool. We model 3M India to report revenue and PAT CAGRs of 18.1% and 36.6% over FY22-24E, respectively. Maintain BUY with a revised DCF-based TP of Rs27,400 (implied P/E 61x of FY24E EPS; earlier TP-Rs26,500).

* Q2FY23 result: 3M India reported revenue growth of 16.3% YoY. EBITDA and adj. PAT rose 33.3% and 65.4% YoY, respectively. While gross margin was down 146bps YoY, the company expanded EBITDA margin by 161bps YoY led by operating leverage. Standalone revenue was up 19.1% YoY and revenue of 3M Electro (consolidated – standalone) was down 18.2% YoY. PAT margin of the company was 10.9% during the quarter, up 323bps YoY.

* Segment-wise performance: All segments reported strong YoY revenue growth during the quarter with healthcare at 16.8%, consumer at 4.7%, safety and industrial at 10.1% and transportation and electronics at 27.9%. Further, we note 3M India expanded its EBIT margin by 194bps and 479bps YoY in healthcare and transport & electronics segments, respectively.

* Strong cashflows for capex in-spite of large dividend: The company announced its first-ever dividend of Rs850/share in Q2FY23. This will amount to cash outflow of Rs9,575mn. While this will result in lower other income in FY23, we believe its capability to invest in capex remains intact due to net cash of Rs4bn even after payment of dividend. 3M India also generates OCF more than Rs3bn per year.

* Maintain BUY: We model 3M India to report revenue and PAT CAGRs of 18.1% and 36.6%, respectively, over FY22-FY24E with steady improvement in RoE over FY22- 24E. We retain BUY rating on the stock with a revised DCF-based target price of Rs27,400 (implied P/E 61x of FY24E EPS). Key risks: Failure of new products and steep inflationary pressures.

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