The Hindu Business Line : 3M India: Buy

The stock trades at a price that is 33 times its trailing 12-month earnings. This is at the lower end of its historical valuation band of 27-46 times.

The sheer breadth of 3M India’s product portfolio, which is positioned to tap lucrative niches in several high-growth sectors makes a case for investing in the stock. Not only does 3M’s repertoire of brands offer good potential for scaling up earnings, the diverse client base also lends resilience against cyclical blips in one or more user sectors.

Import-intensive

A 76 per cent subsidiary of 3M Company, US, 3M India mainly imports, converts and distributes the parent’s products in India. The company’s operations are import-intensive; an appreciating rupee can, thus, expand profit margins. The company caters to five key business segments — industrial markets, automotive/specialty materials, healthcare, traffic/safety, consumer/construction. Of these, automotive and specialty products (35 per cent of revenues), traffic and safety (19 per cent) and industrial markets (19 per cent) have been key revenue drivers in recent years. This augurs well for the company’s operating profit margins as the automotive and traffic/safety segments have the highest margin profiles within 3M India’s product basket.

3M’s product roster within each of these segments is large. In automotives, the company supplies a range of design and engineering products (vehicle graphics and badging, protective films and refinishing products) to automobile manufacturers. The company has also forged relationships with car dealerships in India to tap into the lucrative car detailing services market.

High on potential

The emergence of India as a manufacturing hub for global automotive giants allows scope for 3M India to expand its Indian offerings by leveraging on its global client relationships. Meanwhile, the upgradation by Indian car buyers to mid-sized and luxury cars could translate into strong demand for 3M’s car care services.

Prospects for the industrials business (cleaning solutions, specialty adhesives, refinishing and abrasives) are equally strong on the back of accelerated investments in the domestic construction, auto and metal fabrication sectors.

The traffic and display segment includes products such as reflective and safety material for roads, films and toners for hi-tech outdoor advertising and safety gear for workmen.

With several of the user segments benefiting from the upturn in the domestic economy as well as the capex cycle, 3M India’s sales have doubled in three years, registering a compounded annual growth of 31 per cent. Net profits over the same period have grown at an annualised 28 per cent.

While operating profit margins have fluctuated in the 16-19 per cent band, a tilt in the product mix in favour of high-margin segments, firm trends in the rupee exchange rate and a possible increase in the local manufacture component could contribute to more stable margins in future.

With the parent already identifying the emerging markets as a thrust area, a slowdown in the offtake in the US due to a slowdown in the automotive or construction sectors, could spur a greater focus by the parent in markets such as India.

Those considering investments need to take note of one key factor. Given the relatively high promoter and institutional holdings, the floating stock is low. This makes for very thin trading volumes as well as high day-to-day volatility in stock price. Purchases may, thus, have to be staggered and timed carefully to obtain the best price.

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