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Strong recovery in Healthcare; Safety & Industrials continue to underperform

While Q3FY22 results were below our expectations, we note 3M India has reported revenue and PAT growth of 35.6% and 37.8% YoY, respectively, in 9MFY22. Q3FY22 was impacted by muted growth in Safety and Industrial segment (1% YoY) and steep inflation in input prices as well freight cost. However, we remain enthused by 45.7% revenue growth in Healthcare segment. Increase in manufacturing activities in India post PLI and higher budgetary allocations to investments would potentially be a medium-term positive for 3M India, in our view. However, we expect increase in RM inflation to impact near-term earnings. 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. We cut FY22-23E earnings to factor in muted Q3FY22 and higher inflationary pressures. Maintain BUY with a revised DCF-based TP of Rs29,000 (implied P/E 60x of FY24E EPS).

Q3FY22 result: 3M India reported revenue growth of 11.4% YoY (2-year CAGR of 5.3%). However, EBITDA and adj. PAT declined 23.5% and 20.9% YoY, respectively. Inflation in input prices and rising freight costs led to EBITDA margin contraction of 527bps YoY. Standalone revenues were up 11.7% YoY and revenues of 3M Electro (Consolidated – Standalone) were up 8.6% YoY.

Segment-wise performance: Healthcare and Consumer segments reported strong growth of 45.7% and 14.7%, respectively. However, Transportation and Electronics segment reported revenue growth of 10.9% YoY. Closure of Automotive stickers business also impacted its revenue growth YoY. Safety and Industrial segment reported muted growth of 1% YoY (two-year CAGR was 0%).

PLI – a medium-term opportunity: The company has indicated that it is in touch with the government as well as manufacturers regarding PLI announcements. We expect the increase in manufacturing, infrastructure and construction activities to be a medium-term growth opportunity for 3M India. Initially, it is likely to import products or it may do last-mile manufacturing in India.

Higher input prices: While the increase in input prices and freight inflation caused increase in cost pressures, the company executed price actions and took cost-saving initiatives to reduce the impact of such cost pressures. We model 3M India to report EBITDA margin of ~9% in FY22, lowest in past eight years.

Maintain BUY: We model 3M India to report revenue and PAT CAGR of 19.9% and 42.5%, respectively over FY21-FY24E with steady improvement in RoE over FY21- 24E. We retain BUY with a revised DCF-based target price of Rs29,000 (prior TP: Rs31,000). Key risks: Failure of new products and steep inflationary pressures.

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