3M India - Steady value generator, initiate with ADD - ICICI Securities

3M India (75% subsidiary of 3M USA) follows same template of its parent to steadily launch R&D backed niche products at regular intervals. While 3M products do not cost much to the consumer, they serve critical purposes and add considerable value. Hence, there is high stickiness to 3M products, even in B2B segments. Steady growth (5-10%) in India's key segments (auto, telecom, healthcare, consumer, construction, mining and safety) will lead to sustainable growth for 3M products. 3M India generated RoE > cost of capital and PAT CAGR of 17% over CY08-FY20 due to moats like (1) strong brands (3M, Post-it, Scotch-Brite, Command); (2) strong distribution network and 3M car care centres and (3) access to technology pool of parent. Increase in domestic manufacturing will lead to structural margin expansion bridging the 600bps gap between 3M India and parent's EBITDA margins. We model 3M India to report PAT CAGR of 8.2% over FY20-FY23E. Initiate with ADD and a DCF-based TP of Rs20,000 (55x FY23E).

- Strategy to focus on R&D-based niche products: 3M India's strategy is to generate 30% revenues from products launched in the past five years. It continues to launch 4-5 niche products every year and adds new SKUs and brand extensions as well. While its products do not cost much to consumers, they do add strong value (e.g. stethoscopes add huge value to doctors). Steady growth (of 5-10%) in industries such as telecom, healthcare, safety, consumer, automobiles, road construction and mining will lead to sustainable demand for 3M's products in India.

- Increase in domestic manufacturing; long-term margin driver: 3M India imports 67% of the raw materials. While limited scale in India deters setting up of new manufacturing units, we do expect 3M India to invest in new manufacturing units over the next decade, which will lead to better margins. As the company's EBITDA margin is ~600bps lower than that of parent, we model the gap to be bridged in next decade.

- Steady value generator: 3M India generated an average RoE of >20% (> CoC) and PAT CAGR of 17% over CY08-FY20. 3M's key moats such as: (1) established brands like 3M, Post-it, Scotch-Brite, Command, Littmann and Nexcare; (2) strong distribution across major cities and 3M car care outlets; (3) established relationships with institutions and global players and (4) access to technology pool of parent.

- Initiate with ADD: We model 3M India to report revenue and PAT CAGRs of 4.8% and 8.2% respectively over FY20-FY23E. RoE is also expected to remain above the cost of capital over the same timeframe. We initiate coverage on the stock with an ADD rating and DCF-based target price of Rs20,000 (55x FY23E).

Shares of 3M INDIA LTD. was last trading in BSE at Rs.18325.7 as compared to the previous close of Rs. 18404. The total number of shares traded during the day was 106 in over 76 trades.

The stock hit an intraday high of Rs. 18400 and intraday low of 18211. The net turnover during the day was Rs. 1940642.

Source : Equity Bulls

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