3M India: good reasons for premium valuation
2 min read 12 Mar 2013, 03:21 PM ISTThe stock remains expensive as it trades at 76.7 times its trailing 12 month earnings per share
Premium(3M India can be expected to see good sales growth, especially as its investment plans take off.)
3M Co.’s decision to cut its stake in its 3M India Ltd unit to 25% to become compliant with listing guidelines appears to have disappointed some investors. The offer for sale signals its intention to keep the subsidiary listed and rules out a delisting windfall, at least in the near future.
But that is a short-term view and should not affect how long-term investors perceive the company. India is a key part of 3M’s developing market region. In a recent investor presentation, the company said that it expects developed markets to grow 1-3% while developing markets are expected to grow 5-10% in 2013.
3M India has done quite well in 2012-13 so far, with its sales in the December quarter rising by 18% to ₹ 368.4 crore. That is quite creditable considering that a large portion of its sales are to industrial consumers, and given the weak industrial growth conditions, its performance could have been a lot worse. Almost all its segments did well, except for the safety, security and protection services business. In the year till December, the company’s sales have risen by 16.3% to ₹ 1,147.6 crore.
Depreciation and finance costs, too, have risen significantly, while other income has declined, due to rising capital investments. This is due to 3M India investing in research and production facilities and is expected to continue rising, as the firm invests to increase the proportion of locally made products and also customizes its product range to suit local needs. Initially, these investments will require funding, but if executed properly should also result in higher sales growth in coming years.
The company recently announced that its new Bangalore research facility has got government approval, making it eligible for income-tax benefits. That will allow it to claim a weighted tax deduction on research expenditure incurred at this unit and lower its income-tax incidence. In the nine months ended December, 3M India’s effective tax rate worked out to 33.7%.
3M India’s stock price declined on Monday when the announcement was made, and fell on Tuesday too, losing in all 3.5% of its value compared to Friday’s close. Its share has been declining in 2013, losing 13.8% of its value so far. Some of that can be attributed to concerns on performance; its earnings per share (EPS) is down by 27.5% in the year so far. Still, 3M India remains an expensive stock that trades at 76.7 times its trailing 12 month EPS. The stock has always received a premium valuation, attributable to its multinational company parentage and innovative product pipeline. But that also makes it susceptible to shocks such as the ruling out of a delisting proposal.
This cloud should pass over soon and investors’ focus will return to its business outlook. Having done reasonably well in tough times, 3M India can be expected to see good sales growth, especially as its investment plans take off. Some impact of these plans on the company’s near- to medium-term profitability may be visible, however.
