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Stock Note (Long Term Buy - Accumulate in the Rs. 1600-1850 band) October 22, 2009

3M India Ltd. (3MI), a 76% subsidiary of Minnesota Mining and Manufacturing Company (USA), is a diversified technology
company. The company started its operations in India as Birla 3M' in 1988. Later, in 2002, it was rechristened '3M India Ltd'.
3MI is a manufacturer and marketer of a wide variety of products catering to the industrial, automotive, specialty material,
healthcare, traffic and safety, consumer and office, and construction markets. 3MIs manufacturing takes place in world-class
facilities, meeting various quality systems such as ISO, CE Marking, US FDA standards and GMP. The facilities are located at
Bangalore, Ahmedabad, Pondicherry & Pune.

Over the years, 3MI has earned a stupendous reputation for itself in providing its customers with unmatched product quality. In
India, 3MI offers over 3500 products, while globally 3M has about 55,000 products.

Investment Rationale

Wide product portfolio with diversified client base enables tapping lucrative niches in sectors like
industrial / transportation, healthcare & safety / security having high growth potential

3MI is a manufacturer and marketer of a wide variety of products catering to the industrial, automotive, specialty material,
healthcare, traffic and safety, consumer and office, and construction markets. Not only does 3MIs range of brands offer good
potential for scaling up earni ngs, the diverse client base also lends resilience against cyclical blips in one or more user sectors.
3MIs key segments like industrial & automotive, safety & security and healthcare, which in total account for 79.3% of the total
revenue (in H1CY09) have high growth potential.

The automative and speciality materials segments could benefit from the revival in the automobile sector. Even the industrials
business is expected to do well on accelerated investments in the domestic construction, auto and metal fabrication sectors.
The heatlthcare segment is likely to perform well on account of increasing thrust spends in healthcare. As per WHO, the global
healthcare expenditure is estimated to double by 2015. 3MI is a pioneer and a global leader in the range of products in the
infection prevention portfolio. The traffic and safety markets segment will be back on growth due to accelerated road
construction. The homecare & office-supplies divisions are expected to expand geographical reach & product range. The
spread of the modern trade in tier A & smaller cities will also boost the growth.

With well -built technology base, market leadership, diversified portfolio having well-known brands, reputed client list, strong
marketing & distribution network and consistent new & innovative product launches , we feel that 3MI would be able to
capitalise on the growing opportunities in its respective segments.

Increasing commitment of parent company towards the Indian outfit likely to benefit 3MI.

Moreover, with the parent already identifying the emerging markets as a thrust area, a slowdown in the offtake in the US due
to a slump in the automotive and construction sectors in the advanced markets could spur a greater focus by the parent on
markets such as India.

3MIs parent company has been in the recent past increasing its commitment towards the Indian outfit significantly. The gross
block in the range of Rs 550-700 mn till calendar year CY05 shot up to Rs 794 mn in CY06. This was further raised to Rs 1009
mn in CY07, which rose by 65% to Rs 1669 mn in CY08. The significant increase in gross block gives an indication that the
parent has been investing aggressively in manufacturing capacity in India, since it is upbeat on the prospects of the Indian
economy in long run. Going forward, it could provide 3MI with export opportunities, since the company could manufacture its
products in India at lower cost & export the same in other countries. Also, it could enable 3MI to improve its margins.

Scope for margin improvement

3MIs operating profit has grown at a CAGR of 11.5% over CY05-08. CY08 was an exceptional year wherein the operating
profit reduced by 14.7%. Also, the OPM reduced from 17.1% in CY07 to 12% in CY08. Even in Q1CY09 the operating profit
fell by 23.2%, while the OPM fell by 380 bps Y-o-Y to 11.7%. This was mainly due to the global economic slowdown and forex
as well as raw-material price fluctuations in 2008 & early 2009. However, in CY09 & CY10, we expect the OPM to improve on
the back of improving demand scenario, relatively stable input prices & cost efficiency.

The parents increasing investments in India could benefit 3MI immensely. Firstly, the import content could reduce. Also the
local manufacturing of products will enable 3MI to lower its production cost & improve its margins going forward. Of the five
business segments, the industrial & transportation business and safety, security & protection service business have been the
major revenue growth drivers, which currently account for 64.2% of the total revenue. This augurs well for the companys
operating profit margins as the automotive and traffic/safety segments have the highest margin profiles within 3MIs product
basket. Also, if the rupee appreciates, it could improve the margins further, since the imports would become cheaper (3MI
imports 82% of the total raw material requirements, while the exports are only 0.6% of the total turnover).
3M India Ltd. (3MI) (CMP: Rs. 1735.5)


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OPM has been steadily increasing on Q-o-Q basis from 9.3% in Q3CY08 to 15.4% in Q2CY09. We expect the OPM to
improve to 14% in full year CY09 & 15% in full year CY10. Operating profit is expected to grow at a CAGR of 27.8% over
CY08-10.

PAT has grown at a CAGR of 14.4% over CY05-08. PAT margins reduced from 11.1% in CY07 to 7.7% in CY08. We expect
PAT to grow at a CAGR of 21.1% over CY08-10. PAT margins are expected to improve to 8.1% in CY09 & 8.7% in CY10.

The chart given below gives an overview of 3MIs operating profit & PAT performance since CY06 along with our CY09 &
CY10 projections:

798.9
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Capacity Expansions, new product launches & focused market spends to drive revenues going forward.

3MI is in the process of increasing the capacity of its Ahmedabad facility (at Moraiya) by three-fold at an investment of Rs . 270
mn. The company manufactures corrosion protection products at this facility. In the last five years, the company has invested
Rs. 370 mn in the Ahmedabad facility. The new expanded facility will add to 3MIs local manufacturing capabilities and will
help it address the growing demand for corrosion protection products in both domestic and international markets. The
company is not only eyeing the strong oil and gas sector in the region, but will also supply products for key markets in the Gulf
region, Africa & Europe. Further, 3MI also has plans to set up a multi -segment plant in Ranjangaon, Pune.

3MI has drawn out a plan to improve sales through new product launches, renovation of existing products and focused market
spend. Annually, around 70 new products are being launched by 3MI. Roughly 30% of its revenue comes from the new
products launched in last four years. In 2008, 3MI developed and launched products such as the 3M raised pavement
markers, 3M median markers and 3M dust-free sander for the Indian market. Recently (end of August 2009), 3MIs Car Care
Division launched its latest range of services The Premium Car Interior Cleaning Treatment at Kochi. The service will be
available at all leading car dealerships across the city and will be made availabl e across the country within five-six months.
The premium treatment is foam based allowing it to be applied without using water and can be used to clean almost the entire
cabin area of the car including the car's upholstery, carpets, roof and dashboard whil e keeping the vehicle almost dry. Car
Detailing as a concept in India, was first introduced by 3M Car Care in Bangalore and Chennai and today, is available across
the country in over 130 towns and cities. 3MI also expects to work with the Centre on its unique identification project that
would issue national IDs to every citizen.

3MI, which spends ~6% of its revenues on research & development (R&D), has an innovation centre in Bangalore, also the
location of its first manufacturing plant in India. The R&D is focused on developing products relevant for the Indian market & no
other subsidiary of its parent source the products developed by 3MI at present. 3MI plans to invest around Rs. 600 mn in
setting up a second R&D lab in Bangalore.

With several of the user segments benefiting from the upturn in the domestic economy as well as the capex cycle, 3MIs sales
have almost doubled over CY05-08, registering a CAGR growth of 25%. However, over the last three quarters , the sales
growth has slowed down on account of economic slowdown in 2008 & early 2009. Due to the slowdown, the company could
not benefit much from almost Rs . 1100 mn invested in the last three years in setting up manufacturing facilities in India. The
industrial segment had the maximum impact of the downturn. However, with the economy showing signs of revival, we expect
the sales growth to pick up in H2CY09 & in CY10. Segments like Industrial & Transportation, Healthcare and Safety, Security
& Protection service businesses are expected to remain major growth drivers for the company. Their contribution to 3MIs total
revenue is expected to increase from 77.3% in CY08 to 79.8% in CY10. The automative and speciality materials segments will
benefit from the revival in the automobile sector. The increased spending on global healthcare is expected to boost the


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heatlthcare segment going forward. The traffic and safety markets segment will be back on growth due to accelerated road
construction. Even the display & graphics and consumer & offi ce business are expected to perform well going forward. We
expect the net sales to grow at a CAGR of 14.2% over CY08-10. The 3MI management seems to be more optimistic & wants
3MI to be a billion dollar company in the next five years. The company expects 30% of its topline to come from the new
products, which are the ones introduced in the last three years. 3MIs parent company expects its businesses in the emerging
countries to grow three times the GDP.

The chart given below gives an overview of 3MIs net sales performance since CY06 along with our CY09 & CY10 projections:

9683.6
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Robust Cash Balance & Debt Free status provides margin of safety

3MI has healthy cash & bank balance of Rs. 524.8 mn (as on December 31, 2008), which enables it to fund all its expansion
plans through the internal accruals without resorting to borrowings or equity dilution. Further, 3MI is also a debt free company
& hence does not have to incur any interest cost, which directly has a positive impact on the bottomline. It also provides the
company the margin of safety mainly during high interest rate scenario. Going forward, we expect 3MIs cash balance to
remain robust with NIL debt-equity ratio.

Possibility of Value unlocking through Open Offer / Delisting Proposals

Regulations related to open offers and delisting have undergone some significant changes in the past few years. Under the
Securities and Exchange Board of India (SEBI) Substantial Acquisition and Takeover Code, the limit for creeping acquis ition
by the promoter has been extended to 75% from the earlier threshold of 55%. Offlate, the Multinational companies have been
consolidating their holdings in Indian subsidiaries by giving voluntary open offers or delisting offers to shareholders of thei r
companies. In order to de-list the equity shares the promoter is required to buyback its shares so as to either increase its
holdings to 90% or to that level which is the sum of pre-offer promoters holding and half the offer size, whichever is higher.

At present, 3MIs promoters stake is 76%. Hence, it needs to increase its holdings to 90% through open offer to delist its
shares. Though the company has not come out with any such open offers and / or delisting proposals, given the high
promoters stake & the growth possibilities, it certainly warrants attention. Such an offer, if & when it happens, can result in a
sharp upward movement in the share price. The low floating stock could lead to faster appreciation even in case of relatively
small demand for the stock. However, this also means that exiting large positions may not be that easy.











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Business Profile

3MIs Product Portfolio:

Business Segment Products / Services / Brands
Industrial & Transportation Business 3M Adhesives & Tapes, CUNO filtration systems, Films (including sun control films),
Specialty Materials, Cleaners, Protectors, Polishing, Addictives, Battery Terminal
Coat, Belt Dress Compound & lubricants.
Health Care Markets Infections Prevention Solutions (Sterilization systems [like 3M Steri Vac], surgical
clipper & Avagard), Stethoscopes (Littmann), dental products like Elipar S10 LED
curing light, Clinpro Tooth Crme & orthodontic products like smart clip self litigating
appliance system, Clarity SL Self Litigating bracket, IMTEC Ortho implant temporary
anchorage device, Forsus class II correctors.
Safety, Security & Protection
Service Business
Building & Commercial Services - Entrance Matting System, Fire Protection, Window
Films & Cleaning & Hygiene Solution; Computer Privacy Filters; Corrosion
Protection Products like Scotchkote Rebar Protection Products, Scotchkote
coatings, Scotchcast Powder Epoxy Coatings, Roofing Granules for asphalt shingles
Consumer & Office Business Products that keep homes cleaner, offices organized and buildings well maintained.
Some of the major brands include Scotch, Post-it (notes , flags, memo board,
dispensers & customized post-it), Scotch-Brite and Scotchgard.
Display & Graphics Business Films that brighten the displays on electronic products, such as flat-panel computer
monitors, cellular phones, personal digital assistants & liquid crystal display
televisions. Other products like touch screens & touch monitors; optical components
used in projection televisions; reflective sheeting for transportation safety;
Others Electrical - Terminating and splicing products for both the single & multiple-
conductor applications, cable accessories, electrical tapes, connectors, aluminium
conductor composite; Telecommunication solutions - Products include Diagnostic
testers, fibre optic closures & terminals, fibre distribution cabinets etc.

3MIs businesses
Industrial and Transportation Business

3MIs innovative products and services help manufacturers improve their businesses. The company provides high-quality
abrasives, tapes, films, adhesives, and specialty materials for the manufacture, repair, and maintenance of autos, aircraft,
boats, and other vehicles. 3MIs Energy Markets Division offers a broad range of technologies designed to satisfy the need for
continuous improvements in industrial productivity. Also, in June 2009, 3M CUNO, a leader in the design, manufacture, and
marketing of a comprehensive line of filtration products, launched a state-of-the-art filter validation lab at the 3M Innovation
Centre in Electronic City, Bengaluru.

3M Automotive Aftermarket solution

3M Automotive Aftermarket Solutions provide advanced and high-quality products that cater to every requirement of the
automotive restoration process. With a range of more than 700 products and a customer base spanning the entire globe, 3M is
a trusted brand in the automotive aftermarket segment. The perfect solution - new 3M Perfect-it III Fast Cut Plus
Compound is a fast acting liquid abrasive that removes sanding scratches from refinished or original paintwork and assists in
achieving a superior glossy finish.

3M Car Care

3M Car Care offers a comprehensive and superior range of car care solutions. The Car Care products & accessories include i)
cleaners, polishing & protectors which improve the appearance of cars , ii) addictives and cleaners & flushes, which are
formulated to clean engine parts for a distinctly noticeable difference in power, performance, fuel efficiency and emission, iii)
maintenance products like adhesives, battery terminal coat, belt dress compound & lubricants and iv) sun control films.

Health Care Business

3M Health Care is committed to providing the health care community with innovative solutions, based on 3M's diversified
technologies that help improve the quality of life. Under this segment, the company is into providing medical and oral care
products, and drug delivery and health information systems.




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Safety, Security and Protection Services Business

3MI is a leader in several large and fast-growing markets, including personal safety, security and facilities protection. Its major
products include personal protection product components, laminates that are used to help prevent counterfeiting of
documents, reflective materials for personal safety, window films, cleaning and protection products for commercial
establishments, roofing granules for asphalt shingles, and fire protection products that help protect against the spread of fire,
smoke and toxic fumes.

Consumer and Office Business

3MI is into supplying an array of products that keep homes cleaner, offices organized and buildings well maintained. The
company is a home to some of the world's best-known brands, including Scotch, Post-it, Scotch-Brite and Scotchgard.
Its recent product breakthroughs include Post-it Super Sticky Notes in unique shapes and colours - ideal for use on a broad
range of non-paper surfaces, and a new family of Scotch-Brite cleaning products, which give consumers the right scrubbing
power for a host of cleaning jobs and have given the company an entry into a large and growing market.

Display and Graphics Business

3MI is a leader in films that brighten the displays on electronic products, such as flat-panel computer monitors, cellular phones,
personal digital assistants and liquid crystal display (LCD) televisions. The company is also a leader in touch screens and
touch monitors; optical components used in projection televisions, reflective sheeting for transportation safety, materials and
systems for producing high-performance, attention-getting graphic images.

Electro and Communications Business

3MI is a leading supplier of innovative solutions to the electrical, electronics & communications industries. Its products enable
the efficient transmission of electrical power and speed the delivery of information and ideas. The company competes in
numerous market segments, including electrical utilities, electrical construction, maintenance and repair, OEM electrical and
electronics, computers and peripherals, consumer electronics; and telecommunications (central office, outside plant and
enterprise). Additionally, the company supplies the aerospace, military, automotive and medical markets.

3MI Brands:










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3Ms presence worldwide:

Minnesota Mining & Manufacturing Company, better known as 3M, is a $25 billion American multinational conglomerate, which
has presence in over 60 countries. It produces a wide range of products - from adhesives to optical films - and has total 55,000
products in its portfolio. The company is best known as the maker of Scotch Tape and Post-it. However, what many people
dont realise is that 3M is fundamentally a science-based company. Scotch-Brite is an extension in the area of abrasives.
The company has a core technology platform that's leveraged across multiple areas. It has 40 such core technology
platforms. Both Scotch tapes and Post-it are examples of its strength in adhesives & precision coating.

Increasing presence in India

With the recent slowdown in developed countries like US & Europe, 3M has been identifying emerging markets like India as a
thrust area. The significant increase in 3MIs gross block over the last few years gives an indication that the parent has been
investing aggressively in manufacturing capacity in India.

Shareholding Pattern: (As on June 30, 2009)

Particulars No of Shares (In Mn) % Holding
Institutions 0.6 5.5
Non Promoter Corporate Holding 0.4 3.4
FIIs 0.7 5.9
Promoters 8.6 76.0
Public & Others 1.0 9.2
Total 11.3 100.0

Industry Outlook

The automative and speciality materials segments could benefit from the revival in the automobile sector. The emergence of
India as a manufacturing hub for global automotive giants allows scope for companies like 3MI to strengthen their Indian
offerings by leveraging on global client relationships. The upgradation by Indian car buyers to mid-sized and luxury cars will
translate into strong demand for the automative and speciality materials products. Prospects for the industrials business like
cleaning solutions, specialty adhesives, refinishing and abrasives are equally strong on accelerated investments in the
domestic construction, auto and metal fabrication sectors, which is expected to benefit well -established companies like 3MI
immensely going forward.

The healthcare segment is likely to perform well on account of increasing thrust spends in healthcare. As per WHO, the global
healthcare expenditure is estimated to double by 2015. The speedy progress of medical science & laboratory research and the
globalization of diseases & disease control are actively propelling the healthcare industry to new levels. Today, hospitals are
much more focused on prevention and control of infections and infectious organisms. Increasing infection rates lead to more
usage of antibiotics and longer stay in the hospitals. This also increases the chances of nosocomial infections. Hence, this is
one of the biggest challenges faced by the hospitals. 3MI is a pioneer and a global leader in the range of products in the
infection prevention portfolio.

The traffic and safety markets segment will be back on growth due to accelerated road construction. India has an extensive
road network of ~3.3 mn kilometres, which is the second largest in the world. Though the roads in India carry about 65% of the
freight and 80% of passenger traffic, the quality and extent of the roads is inadequate, making it a priority sector for
development. The new government has earmarked US$92 bn for road and highway construction with immediate effect until
2012, while the government is inviting bids for over 200 national highway projects covering over 13,000 kilometers of road at
this moment.

The homecare & office-supplies divisions are expected to expand geographical reach & product range. The spread of the
modern trade in tier A & smaller cities will also boost the growth.

Competitive Profile:

3MI is positioned against a number of competitors because of its wide product range. However, there is not a single competitor
who has a similar portfolio, which is a plus point for 3MI. Recently, the company has been facing competition from some local
manufacturers who due to sub-optimal manufacturing and different quality standards are able to provide some products at a
different price points. However, 3MI is a diversified technology company, having core technology platforms (currently 40), that
is leveraged across multiple areas. Over the years, the company has earned a stupendous reputation for itself in providing its
customers with quality products. Also, its parent company is steadily increasing its investments in Indian facilities to meet the
increasing demand for its products. With strong technology base, leading market positions, diversified portfolio of well known
brands, good client relationship, efficient manufacturing & distribution and new & innovative product launches consistently, we
feel that 3MI stands in a much better position as compared to its peers & would easily be able to continue to increase its


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market share in its respective segments going forward. This is certainly reflected in the stock price, since at CMP of Rs.
1735.5, it is trading at 23.2xCY10E EPS, which is at a significant premium to the equity market valuations.

Risks and concerns

Increase in the prices of key raw materials like tapes, epoxy & films could impact 3MIs margins going forward if the
company is unable to pass on the input cost increase to its consumers.
Any substantial slowdown in the economic growth could lead to decline in the consumer & business spends & could
impact demand for 3MIs products going forward.
3MI imports around 82% of its total raw material requirements, while its exports are only 0.6% of the total turnover. Thus
rupee depreciation could impact companys profitability going forward.
3MI faces normal market competition in all its businesses, from Indian and international companies. Technology will be
the key to success and products that respond to local market needs will need to be introduced at a fast pace.
Diversification into various business is also a disadvantage for 3MNI, since an investor would be hesitant to enter the
stock if he / she is bullish on any one or two segments only and would buy the company which has presence purely into
that particular segment.

Result Update:

Quarterly

Y-o-Y: Though 3MIs Q2CY09 results were not very impressive, they were much better than the previous three quarters. The
net sales grew by 6.8% to Rs. 2011.6 mn [Q2CY08: Rs. 1883 mn]. However, operating profit growth was much better at 27.8%
to Rs. 310.4 mn [Q2CY08: Rs. 242.8 mn] on account of lower total expenditure, which i ncreased marginally by 3.7% (Y-o-Y).
The total expenditure as a % to sales declined from 87.1% in Q2CY08 to 84.6% in Q2CY09. The purchase of finished goods,
employee cost & other expenses fell by 5.2%, 6% & 0.7% respectively. The OPM improved from 12.9% in Q2CY08 to 15.4%
in Q2CY09. However, raw materials consumed increased by 37%, which restricted further margin expansion. Increase in
depreciation cost (which rose 95.5%) put some pressure on PAT, which increased by 20.2% to Rs. 183.9 mn [Q2CY08: Rs.
153 mn]. PAT margins improved by 100 bps to 9.1%. EPS stood at Rs. 16.3 vs Rs. 13.6 in Q2CY08.

Q-o-Q: Sequentially, net sales grew by 6.9%, while operating profit increased by 40.8% on account of decline in the total
expenditure as a % to net sales from 88.3% in Q1CY09 to 84.6% in Q2CY09. OPM improved by 370 bps from 11.7%. PAT
grew by 45%, while PAT margins improved by 240 bps from 6.7%.

The table below gives an overview of quarterly segmental break-up of 3MIs sales & profits:
(Rs. In Million)
Particulars Q2CY09 Q2CY08 VAR [%] Q1CY09
VAR [%]
(Q-o-Q)
Total Revenue from Operations 2011.5 1883.0 6.8 1882.3 6.9
Industrial & Transportation Business 853.4 839.2 1.7 797.4 7.0
Health Care Markets 325.1 368.0 -11.7 264.7 22.8
Safety, Security & Protection Service Business 440.3 284.5 54.8 407.4 8.1
Consumer & Office Business 176.6 154.3 14.5 153.7 14.9
Display & Graphics business 201.4 229.1 -12.1 252.0 -20.1
Others 14.7 7.9 86.1 7.1 107.0

Profit/Loss Before Interest and Tax 280.1 227.2 23.3 193.4 44.8
Industrial & Transportation Business 70.6 98.4 -28.3 48.7 45.0
Health Care Markets 51.2 3.2 1500.0 17.6 190.9
Safety, Security & Protection Service Business 118.6 71.7 65.4 82.1 44.5
Consumer & Office Business -2.1 -11.5 -81.7 1 -310.0
Display & Graphics business 39.9 65.0 -38.6 43.0 -7.2
Others 1.9 0.4 375.0 1.0 90.0
(Source: Company)

From the above table it can be seen that industrial & transportation business grew marginally by 1.7% in Q2CY09 (Y-o-Y),
while its PBIT declined by 28.3%. Healthcare business did not do well on revenue front, but performed well in profitability
terms. The healthcare segment sales declined by 11.7%, but the PBIT grew significantly by 1500% (Y-o-Y). Safety, Security &
Protection Services business was the best performer both in terms of revenue & profits, which increased by 54.8% & 65.4%
respectively (Y-o-Y). Consumer & Office business revenue grew by 14.5%, however PBIT fell by 81.7% (Y-o-Y). The
performance of Display & Graphics business was disappointing as the sales & PBIT fell by 12.1% & 38.6% respectively.




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Conclusion & Recommendation:

We expect 3MIs net sales & PAT to grow at a CAGR of 14.2% & 21.1% respectively over CY08-10. Capacity Expansions,
new product launches & focused market spends are likely to drive the revenues going forward. Well-diversified client base
would lend resilience against cyclical blips in one or more user sectors. Margins are expected to expand on the back of
improving demand scenario, relatively stable input prices & cost efficiency. The parent companys increasing investments in
India could benefit 3MI immensely, since the import content could reduce & local manufacturing of products will enable 3MI to
lower its production cost. 3MIs key businesses like Industrial & Transportation, Safety & Security and Healthcare, which
currently account for 79.3% of its total revenues (in H1CY09) would continue to remain major growth drivers going forward.
Their contribution is expected to increase to 79.8% by CY10. This could further improve 3MIs margins since automotive and
traffic/safety segments have the highest margin profiles within its product basket.

3MI is cash rich & debt free company, which funds all its expansion plans through internal accruals. The company also enjoys
high return ratios (CY08: ROCE 26.3%, RONW: 16.5%), which are expected to improve going forward, once the capacity
expansions are fully operational. Also, with the promoters stake being high at 76%, there is a possibility that 3MI could come
out with open offer / delisting proposals going forward. Such an offer, if & when it happens, can result in a sharp upward
movement in the share price.

At CMP of Rs. 1735.5, 3MI trades at 29.8xCY09E & 23.2xCY10E EPS. Even though the scrip appears costly on a P/E basis,
this could be misleading since the company has been in the investment phase over the last few years, the full benefits of
which are yet to be reflected in its financials. The stock has quoted at even higher P/E in 2007-08 i.e. ~ 40 times its trailing
CY07 earnings. A more accurate valuation comparison would be in relation to sales. 3MIs market cap to sales ratio is
2.4xCY09E & 2xCY10E net sales, which seems to be reasonable. We feel that the premium valuations could continue to stay,
considering 3MIs strong technology base, leading market positions, divers ified portfolio of well known brands, its good client
relationship, efficient manufacturing & distribution and its ability to launch new & innovative product consistently. Further the
management seems to be very confident, as it wants 3MI to be a billion dollar company in the next five years.

We think that long-term investors could accumulate the stock in the price band of Rs. 1600-1850. While we have made an
attempt to forecast the earnings for the company, a better than expected topline / bottomline achievement and / or greater
visibility on earnings or corporate development could result in a rise in its share price. We feel that the stock has the potential
to trade at atleast 28-29xCY10E EPS, which gives a price target of Rs. 2094-2169 in the next two to three quarters.

Quarterly Financial Performance:
(Rs. In Million)
Particulars Q2CY09 Q2CY08 VAR [%] Q1CY09
VAR [%]
(Q-o-Q)
Q4CY08 Q3CY08
Net Sales 2011.6 1883.0 6.8 1882.3 6.9 1770.7 1917.2
Other Income 7.7 15.0 -48.7 7.4 4.1 25.3 38.7
Total Income 2019.3 1898.0 6.4 1889.7 6.9 1796.0 1955.9
Total Expenditure 1701.2 1640.2 3.7 1661.8 2.4 1589.6 1738.2
Raw Material Consumed 376.3 440.4 -14.6 477.3 -21.2 392.4 491.2
Stock Adjustment 60.7 -121.5 -150.0 35.6 70.5 8.9 -34.2
Purchase of Finished Goods 715.7 755.0 -5.2 635.4 12.6 711.3 687.0
Employee Expenses 242.1 257.6 -6.0 237.9 1.8 209.4 257.5
Other Expenses 306.4 308.7 -0.7 275.6 11.2 267.6 336.7
PBIDT 318.1 257.8 23.4 227.9 39.6 206.4 217.7
Interest 1.1 1.5 -26.7 1.4 -21.4 1.0 1.1
PBDT 317.0 256.3 23.7 226.5 40.0 205.4 216.6
Depreciation 30.3 15.5 95.5 27.1 11.8 25.6 15.8
PBT 286.7 240.8 19.1 199.4 43.8 179.8 200.8
Tax (including FBT & DT) 102.8 87.8 17.1 72.6 41.6 68.6 72.3
PAT 183.9 153.0 20.2 126.8 45.0 111.2 128.5
EPS 16.3 13.6 20.2 11.3 45.0 9.9 11.4
Equity 112.7 112.7 0.0 112.7 0.0 112.7 112.7
Face Value 10.0 10.0 0.0 10.0 0.0 10.0 10.0
OPM (%) 15.4 12.9 19.7 11.7 31.7 10.2 9.3
PATM (%) 9.1 8.1 12.5 6.7 35.7 6.3 6.7
(Source: Company)






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Financial Estimations:

Profit & Loss A/c
(Rs. In Million)
Particulars CY06 CY07 CY08 CY09E CY10E
Net Sales 5057.6 6105.6 7426.6 8123.8 9683.6
Other Income 48.2 85.0 97.5 30.2 36.2
Total Income 5105.8 6190.6 7524.1 8154.0 9719.8
Total Expenditure 4258.7 5062.0 6536.8 6986.5 8231.1
EBITDA (incl. Other income) 847.1 1128.6 987.3 1167.5 1488.8
EBITDA (excl. Other income) 798.9 1043.6 889.8 1137.3 1452.5
Interest 2.8 3.4 4.7 5.0 6.0
Depreciation 64.6 58.9 72.3 119.8 145.3
PBT 779.7 1066.3 910.3 1042.7 1337.5
Tax 275.5 389.5 335.7 385.8 494.9
PAT 504.2 676.8 574.6 656.9 842.6
(Source: Company, HDFC Sec Estimates)

Balance Sheet
(Rs. In Million)
Particulars CY06 CY07 CY08 CY09E CY10E
Share Capital 112.7 112.7 112.7 112.7 112.7
Reserves & Surplus 2125.6 2790.4 3364.9 4021.8 4864.4
Total Shareholders Funds 2238.3 2903.1 3477.6 4134.5 4977.1
Capital Employed 2238.3 2903.1 3477.6 4134.5 4977.1
Gross Block 793.7 1008.8 1668.5 2241.9 2641.9
Less: Depreciation 475.4 442.1 508.6 628.4 773.7
Net Block 318.3 566.7 1159.9 1613.5 1868.2
CWIP 124.8 407.5 273.4 100.0 100.0
Current Assets 2688.7 3010.6 3335.9 3777.2 4582.1
Current Liabilities & Provisions 893.5 1081.7 1291.6 1356.2 1573.2
Working Capital 1795.2 1928.9 2044.3 2421.0 3008.9
Capital Deployed 2238.3 2903.1 3477.6 4134.5 4977.1
(Source: Company, HDFC Sec Estimates)

Key Ratios

Particulars CY06 CY07 CY08 CY09E CY10E
EPS (Rs.) 44.8 60.1 51.0 58.3 74.8
PE (x) 39.1 29.1 34.3 30.0 23.4
Book Value (Rs.) 198.7 257.7 308.7 367.0 441.8
P/BV (x) 8.8 6.8 5.7 4.8 4.0
OPM (%) 15.8 17.1 12.0 14.0 15.0
PBT (%) 15.4 17.5 12.3 12.8 13.8
PAT (%) 10.0 11.1 7.7 8.1 8.7
ROCE (%) 35.0 36.8 26.3 25.3 27.0
RONW (%) 22.5 23.3 16.5 15.9 16.9
Debt / Equity (x) 0.0 0.0 0.0 0.0 0.0
Market Cap/ Sales (x) 3.9 3.2 2.7 2.4 2.0
(Source: Company, HDFC Sec Estimates)















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Analyst: Mehernosh K. Panthaki (Mehernosh.Panthaki@hdfcsec.com)




RETAIL RESEARCH Tel: (022) 6661 1700 Fax: (022) 2496 5066 Corporate Office
HDFC Securities Ltd. Trade World, C. Wing, 1st Floor, Kamala Mills Compound, Senapati Bapat Marg,
Lower Parel, Mumbai 400 013 Phone: (022) 66611700 Fax: (022) 2496 5066 Website: www.hdfcsec.com
Email: hdfcsecretailresearch@hdfcsec.com
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This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a
solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or
complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities
referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this
document. This report is intended for Retail Clients only and not for any other category of clients, including, but not limited to, Institutional
Clients