Honeywell Automation India - Unique play in domestic automation - initiate with HOLD - ICICI Securities

Honeywell Automation India - Unique play in domestic automation - initiate with HOLD - ICICI SecuritiesHoneywell Automation India (HAIL) is a domestic leader in process automation and pioneer in related technologies. HAIL also has presence in building automation and has built a global engineering services business, which caters largely to the parent (US-based Honeywell International Inc.) and its overseas subsidiaries. Leveraging on the parent's expertise, HAIL has market leadership in the domestic oil & gas space, both in the refinery segment and retail stations. Export segment has become a major growth driver and this is likely to sustain. Taking cognisance of the differentiated nature of the export and the domestic automation segments, we value HAIL at an SoTP-based target price of Rs31,400 and initiate coverage with a HOLD rating.

- Top in India oil & gas automation: Leveraging on the parent's expertise, HAIL has leadership in upstream, downstream and retail automation solutions in the domestic market. It also has leadership in the gas segment and CNG stations. As per our Oil & Gas analyst Vidyadhar Ginde, around Rs5tn of investments are expected to take place in Indian oil & gas sector over the next 5 years in E&P, refining, marketing, petrochemical, pipelines and CGD.

- Leadership in domestic process automation: HAIL is also engaged in 'smart city' solutions in areas of traffic management, etc. Company also has healthy market share in automation solutions for other process industries such as chemicals, paper, sugar, metals, thermal power, etc.

- Secular growth in exports: Exports witnessed strong growth at 17% CAGR during FY16-FY20 and contributed 44% to FY20 revenues. Majority of these exports are towards overseas entities related to the parent comprising global engineering services. We believe, given the low-cost advantage of outsourcing to the Indian entity by the parent, HAIL's export growth trend is likely to continue.

- Tapping into building automation: HAIL is one of the major players in the domestic building automation market. This segment is expected to witness healthy growth given the focus on security and safety. Additionally, energy optimisation solutions are evolving as a potential growth area.

- Initiate with HOLD given rich valuation: Given the outsourcing nature of the export segment, we assign a different multiple for this segment than the domestic segment. Hence, we value the stock by SoTP methodology. Given the long-term secular growth drivers in process automation, diversification towards building and cyber security, and constant improvement in the company's technical portfolio, we initiate coverage on HAIL with a HOLD rating despite rich valuation. We assign an SoTP based target price of Rs31,400 implying a multiple of 60x FY22E earnings to the domestic business and 30x FY22E to the export business. We assume the percentage contribution of exports in the earnings to be similar as in the revenues.

Shares of HONEYWELL AUTOMATION INDIA LTD. was last trading in BSE at Rs.32200 as compared to the previous close of Rs. 32233.15. The total number of shares traded during the day was 139 in over 95 trades.

The stock hit an intraday high of Rs. 32271.5 and intraday low of 31815. The net turnover during the day was Rs. 4463342.

Source : Equity Bulls

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