3M India Ltd plans to increase revenue to $1 billion (Rs4,450 crore) by 2015, meaning sales will have to grow at an annual average growth rate of 29%. The company is adding new products, customizing them for the Indian market, creating sufficient capacity, widening its market reach and hiring people to drive these initiatives.
The results are already showing, but its 2010-11 annual report brings out another dimension. Cash generated from operations fell to Rs90 crore from Rs146 crore in the previous year. The previous year was a 15-month fiscal. Even after adjusting its profit figure, the resulting cash from operations would fall by about 20%. Its working capital needs have shot up because of its growth appetite.
Adding new products means creating more inventories and widening market reach translates to more debtors. This is in the initial phase and once it attains critical mass, its cash flow will normalize.
In 2010-11, the increase in working capital was about Rs71 crore compared with an increase of Rs15 crore in the previous year.
Higher profit could have compensated for it, but costs have risen higher than sales. Sales have risen by 35%, while operating profit rose by 26%. That is healthy by normal standards and reflects a strategy that is working. But hiring expenses and royalty, or fees paid to its parent, were the key reasons for higher costs.
3M India’s focus on growth may result in this situation continuing for some more time. The company plans to open more branches and widen its distribution reach to more cities and even rural areas with potential customers. Its product portfolio is being scaled up. It is introducing new products in almost every category it operates in and has identified infrastructure, automotive, consumer and healthcare as its focus areas.
The focus is on product innovation for local markets and the company aims to take sales from new products to about 40% in 2015 from the current level of about 32%, according to a presentation made to investors of 3M India’s parent firm. Two new research centres are being set up to support this target. Localization is another priority, and the company aims to drive up local sourcing to lower costs and get more flexibility.
These strategies will involve higher capital investments, which were about Rs100 crore in 2010-11. After investing about Rs180 crore in 2011, it plans to invest about Rs290-300 crore annually between 2012 and 2015. The level of planned investments signals an aggressive growth plan.
It should not be a difficult task for 3M India to become a $1 billion firm. But the key factor to watch out for is when does its cash flow from operations return to the growth path, and what rate of growth it maintains. About 10% of its 2015 revenue target is to be achieved through an acquisition, which will require funds, too. Ideally, it should aspire to fund its capital investments through internal resources; alternatively it may have to borrow or raise funds through the equity route.
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