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Strong revenue recovery; lower margins

Key takeaways from Q2FY22 results: (1) All segments except Safety & Industrial continued to report healthy recovery. We note revival in automotive, infrastructure and construction sector and better consumer off-take were chief growth drivers, (2) revenues grew 21.8% YoY, but EBITDA and adj. PAT declined 18.7% and 14.2% YoY and (3) gross margins declined 165bps YoY due to input material cost inflation. Increase in manufacturing activities in India post PLI would potentially be 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. Maintain BUY with a revised DCF-based TP of Rs31,000 (implied P/E 57x of FY24E EPS; prior TP: Rs26,900).

* Q2FY22 result: 3M India reported revenue growth of 21.8% YoY (2-year CAGR of 4.9%). However, EBITDA and adj. PAT declined 18.7% and 14.2% YoY, respectively. Inflation in input prices and rising freight costs led to EBITDA margin contraction of 547bps YoY. Standalone revenues were up 19.9% YoY and revenues of 3M Electro (Consolidated – Standalone) were up 49.9% YoY.

* Segment-wise performance: All segments except Safety & Industrial reported strong revenue growth YoY. Revenue growth of Healthcare, Consumer and Transportation & Electronics was 68.2%, 26%, and 31.4%, respectively. Safety & Industrial revenue growth was 0.8% YoY. EBIT margin expanded 288bps and 796bps YoY for healthcare and consumer safety segments, but declined 1430bps YoY for safety and Industrial segment.

* 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.

* 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 increase in manufacturing, infrastructure and construction activities to be medium-term growth opportunity for 3M India. Initially, it will import products or it may do last mile manufacturing in India.

* Maintain BUY: We model 3M India to report revenue and PAT CAGR of 17.6% and 47.7%, respectively over FY21-FY24E with steady improvement in RoE over FY21- 24E. We retain BUY with a revised DCF-based target price of Rs31,000 prior TP: Rs26,900. Key risks: Prolonged weakness in economy and failure of new products.

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