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FY23 annual report analysis: Strong growth in end-user industries leading to healthy EVA creation

We remain enthused about 3M India post analysing its FY23 annual report. Key highlights: (1) Most end-user industries – e.g. automotive, infrastructure and manufacturing – have reported revival, which augurs well for 3M India. (2) Company has passed on additional costs with a lag and, with relatively stable exchange rates, it improved its EBITDA margin to 15.3% in FY23 from 11.7% in FY22. (3) Company has continued to introduce multiple new products and invest in partnerships. We model these investments to be DCF-accretive. We remain positive on 3M India due to its competitive advantages such as: 1) strong brands, 2) established distribution network, 3) global relationships with large manufacturers, and 4) access to parent’s technology pool. Maintain BUY with a revised DCF-based target price of INR 35,200 (implied P/E 56x FY25E EPS).

EVA creation remains strong

3M India has continued to generate strong return ratios and, with healthy earnings growth (65.8% YoY) in FY23, EVA creation has remained robust. The dividend payout of INR 950/share will also likely lead to higher EVA creation ahead. FCF generation too has remained strong due to limited capex and negligible investments in working capital.

Takeaways from chairman and managing director’s speeches

We note three important points: (1) Stronger opportunities led by additional spends on infrastructure, revival of automotive sector and additional investments in manufacturing led by PLI benefits are resulting in new opportunities for 3M India. (2) Company aims to expand its product portfolio for the retail segment, which may lead to higher growth for the consumer division. (3) Healthcare segment continues to witness traction as 3M India has initiated multiple partnerships.

Steady launch of new products

3M India has continued to introduce multiple differentiated products. It has recently introduced: (1) paint sprays and cups for reducing paint wastage and improving precision at paint shops, and (2) it has also introduced double-sided tapes to customise home décor.

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