3m india ltd Management discussions


ANNEXURE ‘A TO THE REPORT OF THE BOARD OF DIRECTORS

Cautionary Statement:

Members and Investors are cautioned that the discussion in this section of the Annual Report may contain statements that involve risks and uncertainties. Forward-looking statements mentioned may involve risks and uncertainties that could cause results to differ materially from those projected. Consequently, actual results, performance or achievements could thus differ materially from those projected in any such forward looking statements. The Company cannot guarantee that these assumptions and expectations are accurate or will be realised. The Company assumes no obligations, assumptions and expectations of future events and trends that are subject to risks and uncertainties. Actual future results and trends may differ materially from historical results or those reflected in any such forward- looking statements depending on a variety of factors.

THE COMPANY

The Company is the flagship listed Company of 3M Company, USA in India. 3M Company, USA is a diversified technology and science company with a global presence in the following businesses: Safety and Industrial; Transportation & Electronics; Health Care; and Consumer and is among the leading manufacturers of products for many of the markets it serves. Most of its products involve expertise in technology, product development, manufacturing and marketing and are subject to competition from products manufactured and sold by other technologically oriented companies.

The Company has manufacturing facilities in India at Ahmedabad, Bengaluru, Pune. Its Corporate Office and Customer Innovation Center (R&D Center) are located at Bengaluru. As on March 31, 2023, the Company had an employee strength of 1,108 personnel. As on March 31, 2023, your Company was ranked 177 (PY: 202) based on Market Capitalisation @ 25,86,894 lakhs (PY: 22,18,915 lakhs) and is now among the top 500 (PY: top 500) Companies based on Market Capitalisation (Source: NSE). The Company managed its operations in four (4) operating business segments: Safety and Industrial; Transportation & Electronics; Health Care; and Consumer. The Companys four business segments bring together common or related 3M technologies, enhancing the development of innovative products and services and providing for efficient sharing of business resources.

3M products are sold through numerous distribution channels, including directly to users and through numerous e-commerce and traditional wholesalers, retailers, jobbers, distributors and dealers in a wide variety of trades. Management believes that the confidence of wholesalers, retailers, jobbers, distributors and dealers of 3M and its products — a confidence developed through long association with skilled marketing and sales representatives — has contributed significantly to 3Ms position in the marketplace and to its growth.

The Company is committed to creating long-term value to shareholders. Accordingly, the Company is dedicated to achieving high levels of operating performance, cost competitiveness, enhancing the productive asset and resource base and striving for excellence in all areas of operation. The Company firmly believes that its success in the marketplace and good reputation are among the primary determinants of shareholder value. Its close relationship with customers and a deep understanding of their challenges and expectations drive the development of new products and services. With many decades of expertise and know-how, the Company offers its customers solutions that enhance their projects and builds trust. Anticipating customer requirements early and being able to address them effectively requires a strong commercial backbone. The Company continues to develop this strength by institutionalising sound commercial processes and building world-class commercial capabilities across its marketing and sales teams. The Company uses different innovative approaches in the development of its products and services, as well as execution of growth opportunities. The Company is also committed to creating value for all its stakeholders by ensuring that its corporate actions positively impact all the dimensions of sustainable development viz., economic, social and environment.

GLOBAL ECONOMIC OVERVIEW

Major forces shaped the global economy over 2022, which seem set to continue through 2023. While accelerated COVID vaccination programs in many economies helped people move past the pandemic, there were uncertainties due to the continued war in Ukraine and rise in energy costs and commodity prices, which caused global growth to slow down in 2022 to 3.2%. Supply Chain disruptions continued to plague the global economy with multiple bottlenecks including war induced energy shortages and extreme weather conditions due to climate change. Public and private debt reached new highs.

Coming into 2023, there was some improvement in activity and sentiment with the decline in energy and food prices giving some respite. Reopening of China, which had gone into lockdown towards the end of 2022, had a positive impact reducing supply chain pressures.

Even as economies worked on cushioning the impact of the Ukraine-Russia war, early 2023 also saw uncertainty emerging in the banking and financial sector. The global economic outlook estimated by the World Economic Forum and the International Monetary Fund is 2.3% in 2023. Advanced economies are expected to see slower growth compared to countries like India.

Structural factors continue to impede global growth in the medium to long term. Steps to strengthen multilateral cooperation are necessary to create a more resilient world economy by mitigating the risks of financial vulnerabilities and the costs of climate change.

INDIA ECONOMIC OVERVIEW

Indias economy staged a resilient recovery across all sectors despite the challenging macro-economic conditions that prevailed over 2022. While real GDP for FY 22-23, estimated at 6.8-7% is lower than FY 21-22, it is still higher than other advanced economies, making India one of the faster growing economies of the world. Global supply chain disruptions and high inflation rates impacted the economy, but the Government took a multi-pronged approach to cushion the impact of rising inflation rates. Enabling government policies such Production Linked Incentive schemes further increased positive growth across all sectors with trade, tourism, hospitality, construction and utility industries driving momentum. Growth in private consumption led to a boost in production activity resulting in enhanced capacity utilisation across sectors.

Government continued to support manufacturing as Indias Industrial Production Index grew at 5.6% during the year. With an emphasis on infrastructure-intensive sectors like roads and highways, railways and housing and urban affairs, the increase in Capex has large-scale positive implications for medium-term growth. Another growth driver for the economy was the strengthening of balance sheets of the corporate sector during the financial year.

Recent global developments such as vulnerabilities in the banking and financial sector, oil production cuts by OPEC and unpredictable weather patterns continue to pose risks to Indias forecast for FY 23-24 which is expected to be in the range of 6- 6.5%. The medium to long term outlook is positive and India is positioned to be on a strong growth curve.

STANDALONE RESULTS OF THE OPERATIONS OF THE COMPANY

On a standalone basis your Companys revenue from operations increased by 21.28% at 373,344.21 lakhs for the financial year ended March 31, 2023 compared to 307,830.08 lakhs in the previous financial year. The Profit before Interest and Depreciation is 62,401.29 lakhs compared to 41,660.78 lakhs for the previous financial year. Profit before Tax is 56,079.61 lakhs compared to 35,969.60 lakhs for the previous financial year. The operating margin for the current year is 16.43% compared to 13.38% for the previous financial year. Total Comprehensive Income is 41,658.80 lakhs compared to 26,727.38 lakhs for the previous financial year. Export Sales is 2,188.81 lakhs for the financial year ended March 31, 2023 compared to 2,385.65 lakhs in the previous financial year, a decrease of 8.25%, due to less demand in the global market.

Other Income:

The other income is 6,422.12 lakhs for FY 22-23 compared to 3,471.84 lakhs for the previous FY 21-22.

Cost of Goods sold:

The % of cost of raw material consumed as against sales for FY 22-23 is higher by 0.12% at 61.61% as against 61.49% for the previous FY 21-22, due to product mix and increase in foreign currency exchange rate.

Employee Benefits Expense:

Employee cost as a % of sales for FY 22-23 stood at 9.63% (previous financial year was 11.22%) at 36,553.40 lakhs (previous financial year: 34,940.51 lakhs). Sales per employee has increased by 24.64% to 342.75 lakhs (no. of employees 1,108) in the current FY 22-23 from 275.00 lakhs (no. of employees 1,132) for the previous FY 21-22.

Finance Cost:

The interest cost for FY 22-23 is 709.96 lakhs compared to 363.56 lakhs in the previous FY 21-22. The interest cost is on account of lease rentals of vehicles and office equipment.

Interest earned:

The Company earned 3,962.68 lakhs on the surplus during FY 22-23 when compared to 2,726.19 lakhs during FY 21-22 by keeping the funds in deposits with the Banks.

Earnings per Share (EPS):

The EPS (Basic and Diluted) of the Company for FY 22-23 was 369.41 per Share as compared to 236.28 per Share in the previous FY 21-22, a increase of 56.34%.

Share Capital:

The Authorised/Issued/Subscribed and Paid-up Capital as on March 31, 2023 is 112,650,700 (divided into 1,12,65,070 Equity Shares of 10/- each). During the year under review, the Company has not issued Shares with differential voting rights nor granted Stock Options nor Sweat Equity.

Reserves & Surplus:

41,658.80 lakhs is retained in profit and loss account for the year ended March 31, 2023. The Reserves & Surplus is 193,657.31 lakhs including the current financial year retained profit.

Shareholders Fund:

The total shareholder funds decreased to 194,783.82 lakhs as at March 31, 2023 from 248,878.12 lakhs as of the previous FY 21-22, representing a decline of 21.74% mainly because of payment of dividends.

Depreciation:

The depreciation charge for the current financial year is lower at 5,611.72 lakhs when compared to 5,327.62 lakhs of previous FY 21-22.

Fixed Assets-Capital Expenditure:

The gross Fixed Assets as at March 31, 2023 was 55,223.13 lakhs as compared to 49,563.21 lakhs of previous FY 21-22. Capital Investments during FY 22-23 were at 6,009.47 lakhs (Net of capital work-in-progress and capital advances) (FY 21-22: 6,999.06 lakhs) an decrease of 14.14% year on year.

Inventories:

Inventory as at March 31, 2023 amounted to 56,760.33 lakhs as compared to 45,347.77 lakhs of previous FY 21-22. The inventory ratio has increased to 89 days as at March 31, 2023 from 84 days of previous FY 21-22.

Trade Receivables:

Trade Receivables as at March 31, 2023 amounted to 59,510.20 lakhs as against 48,857.75 lakhs of previous FY 2122. The debtors turnover ratio is 58 days (previous financial year: 58 days).

Cash and Bank balances:

The total balance of cash and bank balances as at March 31, 2023 was 63,198.06 lakhs as compared to 120,653.96 lakhs as at March 31, 2022.

Key Financial Ratios:

During the year, the significant changes in the financial ratios of the Company, which are more than 25% as compared to the previous year are summarised below:

Particulars March 31, 2023 March 31, 2022 % Change Reasons for Variance
1 Debtors Turnover (Days) 58 58 -1.72
2 Inventory Turnover (Days) 89 84 5.95
3 Interest Coverage Ratio 79.98 99.94 -19.97
4 Current Ratio 2.04 3.12 -34.82 Change in cash balance due to payment of interim dividend
5 Debt Equity Ratio 1.37 0.98 39.80 Changes in equity due to payment of interim dividend
6 Operating Profit Margin (%) 16.43 13.38 22.80
7 Net Profit Margin (%) 11.29 8.83 27.80 The increase is due to the increase in profitability
8 Return on Net Worth (%) 21.36 10.69 99.81 The increase is due to the increase in profitability

Overall analysis of the Profit and Loss (Standalone):

Particulars Year Ended March 31, 2023 Year Ended March 31, 2022
in lakhs % in lakhs %
Revenue from operations 373,344.21 98.31 307,830.08 98.88
Other income, net 6,422.12 1.69 3,471.84 1.12
Total Revenue 379,766.33 100.00 311,301.92 100.00
Cost of Materials consumed 156,580.77 41.23 130,084.69 41.79
Purchases of stock-in-trade 81,310.30 21.41 62,193.44 19.98
Changes in inventories of finished goods, work-inprogress and stock-in -trade (3,914.37) (1.03) (853.23) (0.27)
Employee benefits expense 36,553.40 9.63 34,940.51 11.22
Other Expenses 46,834.94 12.33 43,275.73 13.90
Profit before Finance costs and Depreciation 62,401.29 16.43 41,660.78 13.38
Finance Costs 709.96 0.19 363.56 0.12
Depreciation and amortisation expense 5,611.72 1.48 5,327.62 1.71
Total Expenditure 323,686.72 85.23 275,332.32 88.45
Profit before Tax 56,079.61 14.77 35,969.60 11.55
Tax 14,465.22 3.81 9,352.09 3.00
Profit for the year 41,614.39 10.96 26,617.51 8.55
Items that will not be reclassified subsequently to profit or loss 44.41 0.01 109.87 0.04
Total comprehensive income for the year 41,658.80 10.97 26,727.38 8.59

Overall analysis of the Profit and Loss (Consolidated):

Particulars Year Ended March 31, 2023 Year Ended March 31, 2022
in lakhs % in lakhs %
Revenue from operations 395,936.77 98.31 333,584.17 98.90
Other income, net 6,809.59 1.69 3,711.51 1.10
Total Revenue 402,746.36 100.00 337,295.68 100.00
Cost of Materials consumed 163,479.56 40.59 140,774.54 41.74
Purchases of stock-in-trade 87,856.71 21.81 69,977.05 20.75
Changes in inventories of finished goods, work-inprogress and stock-in -trade (5,305.47) (1.32) (1,683.02) (0.50)
Employee benefits expense 40,034.14 9.94 38,819.21 11.51
Other Expenses 49,442.67 12.28 46,772.33 13.87
Profit before Finance costs and Depreciation 67,238.75 16.70 42,635.57 12.64
Finance Costs 727.03 0.18 372.04 0.11
Depreciation and amortisation expense 5,767.91 1.43 5,511.72 1.63
Total Expenditure 342,002.55 84.92 300,543.87 89.10
Profit before Tax from continuing operations 60,743.81 15.08 36,751.81 10.90
Tax 15,641.89 3.88 9,554.70 2.83
Profit for the year 45,101.92 11.20 27,197.11 8.06
Items that will not be reclassified subsequently to profit or loss 40.95 0.01 127.26 0.04
Total comprehensive income for the year 45,142.87 11.21 27,324.37 8.10

SEGMENT-WISE PERFORMANCE:

On a standalone basis, the Safety and Industrial business increased by 17.17% Transportation & Electronics business increased by 33.79%; Health Care business increased by 14.14%; and Consumer business increased by 5.73%.

1. Safety and Industrial Business:

This business segment serves the core industrial, electrical, vehicle maintenance and safety markets and offers a range of solutions including personal safety products, industrial adhesives and tapes, abrasives, electrical products and products for the automotive aftermarket.

( in lakhs)

March 31, 2023 March 31, 2022
Financial Highlights Segment Revenue 123,171.72 105,118.82
Profit Before Interest & Tax 12,056.87 8,658.98
Capital Employed 23,518.60 24,482.43
Highlights of Safety and Industrial Business • Industrial Adhesives & Tapes: Strong focus on automotive and general industrial market segments led to the acceleration of the double coated & foam tapes product portfolio. New application wins and product launches fueled growth in the adhesives portfolio.
• Automotive Aftermarket: A focus on improving processes and efficiencies resulted in high double digit share gain for the AAD business especially in the abrasives, fillers & paint finishing segments for auto body shops. A string of new product launches like "Precision Spray Guns", "Paint Preparation Systems 2.0" and the advanced "Ceramic Coatings" have been successful in driving growth for the division.
• Abrasive: Significant strides were made in upgrading customers to robotic & automated solutions for abrasive applications focused on electronics, automotive & metal working applications. The division also invested in a robotics lab at the India R&D center to enhance capabilities.
• Electrical Products: Strong sales of corrosion protection coatings to Oil & Gas infrastructure projects and supplemented by enhanced engagement with all major manufacturers in the renewable energy space as they significantly increased their investments in India.
• Personal Safety: Growth in heavy machinery; transport & chemicals segments helped partially mitigate the healthcare demand attrition in disposable respirators post Covid in India.

2. Healthcare Business:

This segment provides products and services such as medical and surgical supplies, oral care solutions (dental and orthodontic products) and food safety products.

( in lakhs)

March 31, 2023 March 31, 2022
Financial Segment Revenue 51,681.49 45,280.51
Highlights Profit Before Interest & Tax 5,438.34 6,162.86
Capital Employed 10,296.02 9,967.25
Highlights of • Healthcare Business Surgeries and dental procedures rebounded in 2022 leading to the growth of the hospital facing and dental businesses.
Growing adoption and compliance of guidelines and protocols for infection prevention practices in healthcare facilities was augmented by strong partnerships as a knowledge partner with professional medical organisations such as INS India, AORN India, IDA and CAHO which resulted in the expansion of the product portfolio.
Growth in medical education led by 3M clinical professionals helped upgrade clinical and infection prevention practices in hospitals and dental clinics leading to greater adoption of healthcare solutions.

3. Transportation and Electronics Business:

This business segment serves global transportation and electronic original equipment manufacturers (OEM) with

products for automotive and aerospace, commercial solutions, advanced materials and solutions for transportation

safety

( in lakhs)

March 31, 2023 March 31, 2022
Financial Segment Revenue 155,128.67 115,947.10
Highlights of Transportation Business Profit Before Interest & Tax 23,661.33 9,196.44
Capital Employed 36,729.92 32,721.30
Highlights of • Transportation Business Union Budget 2023 has an enhanced capex outlay of 10 lakh crores (

3.3% of GDP) which also included the highest outlay till date for roads, railways, further development of regional airports and transport infrastructure projects that are expected to boost first and last mile connectivity. These offer growth opportunities for 3Ms transportation safety solutions and commercial solutions divisions.

Commercial solutions for hygiene and cleanliness saw healthy growth as back to work initiatives and adoption of hybrid models amongst companies encouraged sales in quick service restaurants, offices, retail and commercial places.
Graphics solutions expanded with growing demand from railways, banking & finance, oil and gas and automotive OEM segments.
Strong growth in the automotive segment.

4. Consumer Business:

This business segments serves consumers with home care, office supply and stationery, home improvement and consumer healthcare products.

( in lakhs)

March 31, 2023 March 31, 2022
Financial Highlights Segment Revenue 40,967.55 38,748.57
Profit Before Interest & Tax 8,255.56 7,720.83
Capital Employed 4,008.76 3,991.57
Highlights of • Consumer Expanded penetration of Scotch-Brite? range of products for all round home cleaning through awareness and enhanced availability of products.
Business ^ Strong sales in Scotch? Mounting tapes and damage free Command™ Hooks helped promote Do-it-Yourself home decor.

OPPORTUNITIES AND THREATS

3M Companys breath of technologies and product portfolio have enabled it to retain its leading market positions. Your Company strongly believes in 3Ms brand equity and its ability to provide customers with innovative solutions. Global campaigns and brand building continue to benefit the Companys business in India.

Your Company is operating in a highly competitive and volatile market which may exert pressure both on the top line as well as the bottom line of the Company. The Companys products involve expertise in product development, manufacturing and marketing and are subject to competition from products manufactured and sold by other technologically oriented companies both within India and outside India. In the addition, rupee depreciation, fluctuating oil & high commodity prices remain key challenges needing focused attention.

RISKS AND CONCERNS

Provided below are cautionary statements of what your Company believes to be the most important risk factors applicable to the Company.

• The Companys results are affected by competitive conditions and customer preferences.

• Foreign currency exchange rates and fluctuations in those rates may affect the Companys ability to realise projected growth rates in its sales and earnings.

• The Companys growth objectives are largely dependent on the timing and market acceptance of its new product offerings, including its ability to continually renew its pipeline of new products and to bring those products to market.

• The Companys future results are subject to fluctuations in the costs and availability of purchased components, compounds, raw materials and energy, including oil, natural gas and their derivatives, due to shortages, increased demand, supply interruptions, currency exchange risks, natural disasters and other factors like the global pandemic.

• Security breaches and other disruptions to the Companys information technology infrastructure could interfere with the Companys operations, compromise information belonging to the Company or its customers, suppliers and employees, exposing the Company to liability which could adversely impact the Companys business and reputation.

• The Companys strategy for growth, future revenues, earnings, cash flow, uses of cash and other measures of financial performance and market position.

• The Companys future results may be affected by its operational execution, including scenarios where the Company generates fewer productivity improvements than estimated.

• Asset impairments.

INTERNAL CONTROL SYSTEMS AND THEIR ADEQUACY

All key functions and divisions of the Company are independently responsible to monitor risks associated within their respective areas of operations such as production, supply chain, marketing, finance, accounting, treasury, legal and other areas like health, safety and environment. The Company has identified various risks through an internal self- assessment compliance checklist and has laid out necessary procedures to mitigate the same.

The Company has in place adequate systems of internal control commensurate with its size and the nature of its operations. These have been designed to provide reasonable assurance with regard to recording and providing reliable financial and operational information, complying with applicable statutes, safeguarding assets from unauthorised use or losses, executing transactions with proper authorisation and ensuring compliance of corporate policies. The Company, through its own Corporate Internal Audit Department, carries out periodic audits to cover all the offices, factories and key areas of business segments based on the plan approved by the Audit Committee and bring out any deviation to internal control procedures. The Internal Auditor functionally reports to the Audit Committee and administratively to the Managing Director. The observations arising out of audit are periodically reviewed and compliance ensured. The summary of the Internal Audit observations and status of the implementation is submitted to the Audit Committee of the Board of Directors. The status of implementation of the recommendations is reviewed by the Committee on a regular basis and concerns, if any, are reported to the Board.

DEVELOPMENTS IN HUMAN RESOURCES/ INDUSTRIAL RELATIONS

Learning and Development:

Your Company continued to advance its goal of equipping employees with the skills required to adapt and thrive in a volatile and evolving environment. During the year, 3M Learn, a global learning platform was launched which accelerated a more digital and integrated learning system with the scope to offer more customised Learning Tracks to employees. Learning Tracks continually trains our entire workforce with culture-related skills, core or power skills, critical and emerging leadership skills and business-specific functional and technical skills.

Supervisory learning tracks was an added development during the year raising the leadership development level of employees in supervisory roles. 3M India saw a completion rate of almost 95% at the end of 2022.

Human Resource Business Partnering/Total Rewards/ Employee Engagement

The Company also augmented efforts to support employee well-being with several measures, policies and initiatives promoting physical, mental and emotional well-being. Initiatives included running a comprehensive wellness calendar, introduction of annual health check up partners and easier processes to avail them, an annual employee benefits fair and employee engagement led wellness programs like 3M Stepathon. Key outcomes include a tripling of employees who availed the annual medical check up facility, 40+ sessions on mental well-being and a 75% participate rate in the 3M Stepathon challenge.

The Company deepened its focus on Diversity, Equity and Inclusion during the year. Employee Resource Networks (ERNs) are the catalysts for driving employee inclusion and belonging. The newest ERN to be added to the mix was The Diverse Abilities network (DAN), which was launched to build awareness and allyship to embrace people with disabilities into the organisation.

To increase the participation of women in the workforce, your Company strengthened the Manufacturing - Women Leadership Development Forum which worked to expand the pool of women employees hired in the production areas of manufacturing sites. As a way to offer opportunities to women returning to the workforce after a break, your Company introduced a pilot programme called 3M Revive, a return-to-work internship opportunity.

3M Revive offered women a 6-8 month assignment or project based role in addition to skill development and mentoring. The initiative was well received by both business and function teams and the women who participated in the programme.

The Company enhanced its benefits offering to promote inclusion with the introduction of new policies like the Nanny Allowance policy to support new mothers with greater work life balance and the Leave Donation policy which encourages employees to donate their sick leaves to those in need.

All of these actions move your Company closer to being an enterprise where people are respected and everyone feels a sense of belonging — both within and outside the Company.

Employee Relations:

Your Company continues to move the needle in strengthening employee relations and maintain a harmonious working environment at our manufacturing sites. During the year, a comprehensive career framework was introduced for technical associates. The framework clearly outlines the skills required to perform for all the jobs available and clearly delineates the capabilities for growth across the functions as employees plan their career development. Introduced for the first time through a change management programme, the initiative goes beyond tenure and performance to actually measure future capabilities of our technical associates.

The Performance Management process for technical associates was also aligned to the Corporate performance evaluation framework, Performance Everyday -which looks at performance on an ongoing basis with continuous review and feedback.

Going a step further from regular Kaizen initiatives, your Company further enhanced the responsibilities of technical associates with an initiative called Self Managed teams (SMT) at all the manufacturing sites across multiple value streams. These SMTs compete with each other to generate innovative ideas to solve problems and improve processes on our manufacturing floors.

Other initiatives include:

• Enhanced ownership and participation of plant employees in corporate CSR initiatives.

• Introduction of night shifts for our women employees.

• Outreach programmes from our Manufacturing -Womens Leadership Forum (WLF) to build awareness about careers in manufacturing.

On behalf of the Board of Directors
Ramesh Ramadurai Vidya Sarathy
Managing Director Whole-time Director &
DIN: 07109252 Chief Financial Officer
Place: Bengaluru DIN: 01689378
Date: May 30, 2023