Honeywell Automation India - Stable execution, healthy margins - ICICI Securities

Honeywell Automation India (HAIL) witnessed 3% YoY drop in revenues to Rs8.7bn, despite pandemic-related headwinds. Company reported EBITDA margin of 21.5% (up 50bps YoY) despite 180bps YoY increase in raw material costs to Rs4.6bn as other expenses declined 15.4% YoY and staff expenses dipped 7.6% YoY due to cost-reduction measures, which supported margins. We believe, the margin expansion was aided partly by INR depreciation and partly by reduction in travel due to Covid restrictions. Given the increased focus on government capex as highlighted in the FY22 Union Budget and factoring-in the higher growth and margins, we raise our FY21E and FY22E earnings estimates by 2.1% and 12.2% respectively. Given the company's market leadership in domestic oil & gas space (both in the refinery segment and retail stations), strong parent's expertise, and sustainable growth in exports, we maintain HOLD on the stock with a revised target price of Rs40,679 (earlier: Rs31,400).

- Leadership in domestic process automation: HAIL is engaged inter alia in 'smart city' solutions in the 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. HPCL Barmer related tenders are expected to be finalised in the next six months and, we believe, Honeywell will be a prominence player and win some of the orders. The recently announced Union Budget has loosened the government's purse strings towards infrastructure spending and the company can benefit from opportunities related to process and building automation.

- 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 and comprise global engineering services. We believe, due to 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. The segment is expected to witness healthy growth given the focus on security and safety.

- Maintain HOLD due to rich valuation: 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 maintain our HOLD rating on the stock despite rich valuation. Given the outsourcing nature of the export segment, the multiple we assign to it is different from the one to the domestic segment. Hence, we value the stock by SoTP methodology. We assign a multiple of 65x Sept '22E earnings to the domestic business and 30x Sept '22E to the export business, and thus arrive at an SoTP-based target price of Rs40,679. We assume the percentage contribution of exports in the earnings to be similar as in the revenues. As the growth outlook has improved post the Budget announcement, we raise our domestic target multiple to 65x vs 60x earlier.

Shares of HONEYWELL AUTOMATION INDIA LTD. was last trading in BSE at Rs.41948.8 as compared to the previous close of Rs. 42556.7. The total number of shares traded during the day was 474 in over 327 trades.

The stock hit an intraday high of Rs. 42426 and intraday low of 41160.5. The net turnover during the day was Rs. 19813623.

Source : Equity Bulls

Keywords