Birla 3M: Hold

Recommendation: Hold

Anup Menon

THE stock of Birla 3M is slowly but surely climbing towards the high of Rs 754 that prevailed in early January 2000. Trading at around Rs 600, the stock discounts the latest annualised earnings per share around 43 times.

The company's earnings performance for the first three quarters of fiscal 2000 was impressive. Coupled with the growth opportunities for its line of business, the stock is likely to stay firm. Shareholders can stay invested and consider accumulating the stock at price declines.

Earnings review: Birla 3M's financial performance for the first three quarters of fiscal 2000 was fairly impressive. Earlier, the company had changed its financial year from April-March to January-December. Sales revenues rose 33 per cent to Rs 153.6 crore compared to the corresponding previous period. In the same time-frame, operating margins rose from 8 per cent to around 15 per cent.

With expenses under control, the company managed to post an earnings after tax of Rs 10.49 crore compared to Rs 93 lakhs. On an equity base of Rs 11.27 crore, the annualised per share earnings works out to Rs 12.41 per share against Rs 1.10 per share for the corresponding previous period. The performance should be seen in the light of good cost management. For instance, with the exception of tax liabilities, which went up by 84 per cent, the other expenses were kept on a tight leash. This coupled with increased turnover contributed to the company's bottomline.

Facts: Birla 3M is the domestic face of the US-based Minnesota Mining and Manufacturing Company. It trades in a wide range of products which cater to different industry classes. Around 70 per cent of the products are sourced from other global facilities of 3M. The product range includes commercial graphics, adhesive tapes, healthcare products, abrasives and car paint finish goods. Established brands include Scotch Brite scouring pads and Post-it notepads.

Prospects: The company's prospects for the near-to-medium-term look bright. One of the significant advantages enjoyed by the company is that its cash flows are not sensitive to cyclicalities in the broad economy. This can be attributed to two factors. While on the one hand, the diversity in the end-user community helps reduce cyclicality, on the other, most of the products cater to the household segment where the purchasing power may continue to show a steady rise. This being the case, a slowdown in the broad economy may have a marginal impact on the cash flows and earnings stream of the company.

Since the company derives a fairly large portion of its revenues from household products, it is essential to have an established logistics system. The key factor here would be the company's ability to make its products visible. Since Birla 3M operates in niche markets, marginal increases in costs can be passed on the consumer. Hence, it is critical for the company to let the consumer know about its products.

The other major advantage enjoyed by the company is the fact that it enjoys virtually no competition. Since the end-user segment for the products are diverse, it cannot be classified under any of the normal industry classifications.

From the point of view of costs, the company is at an advantage. Being a trading company, most of the costs are likely to be operational. Hence, the proportion of fixed assets in the balance-sheet will be lower. This also implies that good working-capital management could be crucial to the company's performance and on this score it seems to be doing well.

Overall, the stock is defensive in nature. The future growth rates of the company will depend to a large extent on Birla 3M's expansion plans and the ability to launch products. The low level of floating stock may have an impact on the liquidity of the stock. Shareholders can stay invested and fresh exposures can be considered at price declines.