3M India: Crude prices may hit growth momentum

3M INDIA, the Indian subsidiary of 3M Worldwide, has shown remarkable growth in profits and profitability in the past few quarters on account of sustained industrial demand. The company has increased investments in the Indian market for capacity expansion and a research and development centre, among others. The demand scenario for 3M looks firm but any further increase in crude oil prices will result in disproportionate increase in input costs, thereby impacting margins.

3M is present across diverse business segments, including industrial products, infrastructure, health care and consumables. During the 12 months ended September 2010, the company’s revenues grew by 38% year-on-year and net profit nearly doubled. The operating margin surged by 300 bps to 15% during the period . Recovery in the automotive sector,
increased industrial production, sustained investment in infrastructure and health care are the major growth drivers.

Raw materials account for 55-60 % of the company’s topline. A chunk of its inputs are derived from crude oil. Hence, a sudden jump in crude prices may impact the company’s profitability. Analysts are of the opinion that crude prices may remain rangebound in the near term. The . 1,000-crore company owns brands like home cleaning product Scotch Brite, bookmark notes Post-it , pressure sensitive tapes Scotch tapes, and first-aid products Nexcare.

The company has been investing heavily in India over the past three years for expansion of manufacturing facilities and setting up of research and development facilities. The company’s fixed assets rose by 40% to . 217 crore at the end of September 2010 from the year ago. In its 'In India, For India' policy, the company is looking at customised innovation for the Indian market . It is investing in a new R&D centre in Bangalore.

It filed nine patents during FY09, of which five were global in nature. Since it is in the investment mode, 3M has not yet paid any dividends to its shareholders. 3M India’s stock performance mirrors its financial growth. It has doubled since the start of 2010. It is trading at 38 times its past 12 months earnings and is valued at over four times its annual revenues. The valuations fairly discount the company’s growth promise.