Honeywell Automation India - OFS Note - Nirmal Bang

SUBSCRIBE FROM A LONG TERM VIEW

Honeywell Automation India Ltd (HAIL) has 81% of its stake held by the promoters implying 19% public share holding. Promoter has announced to reduce their stake through an 'offer for sale' (OFS) to comply with minimum 25% public shareholding requirement.

As such Honeywell Auto India (HAIL) proposes to sell an aggregate of 5.51 lakh shares representing 6.24% of the total share capital of the company. The offer for sale opens today at a floor price of Rs 2,150. At this price the share is trading at PE of 23x on trailing EPS.

The company has witnessed declining results in the past two years on account of slow down in the overall capex cycle in various sectors considering the slowdown in economic environment. HAIL had witnessed EBITDA margins of 16% in CY09 which declined to 10.6% in CY10, 9.3% in CY11 and further to 5.8% in 9MCY12.

Similarly, the return ratios have also declined from 30.3% in CY09 to 17% in CY11. The near term results may not be great considering the slowing capex cycle. However, a revival in the overall capex cycle will lead to an improvement in the results of the company and the stock can generate a substantial return in the long run. Moreover, considering the strong parentage and strong market leadership position of the company in the segments where it operates, the current offer for sale provides an excellent opportunity to generate decent returns in the long term. We recommend subscribing to the offer for sale from long term perspective.

The stock had appreciated significantly on hopes of delisting (52 week high of Rs 3,391). Post the announcement of offer for sale the stock witnessed significant pressure and has corrected 29% since the announcement. However, we believe that this correction offers an attractive level to enter the stock from a long term perspective as we expect the price decline overhang to diminish substantially.

- Higher threat and awareness for security along with focus on energy conservation will lead to growth in the segment of Industrial security and safety applications where HAIL has a strong product and solution portfolio.

- HAIL is a debt free company and has cash balance of Rs ~Rs 176 Cr in CY11. Thus it has the ability to generate healthy cash flows to meet investment and financing needs thereby not relying on external sources of funds.

- HAIL has delivered decent RoE in times of good capex cycle of ~30%+ which has declined in the past two years. Going forward, we expect the company to improve back to its historical levels of performance.

- HAIL has been paying 100% dividend to its shareholders.

- HAIL enjoys a strong parentage of Honeywell International which is a Fortune 100 global diversified technology and manufacturing leader.

Honeywell International has a market capitalization of US$47,864 mn as on 30th September 2012. Honeywell International is a component of Dow Jones Industrial Average and S&P's 500 Index.

Source : Equity Bulls

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