Honeywell Automation India - Weak execution impacts earnings - ICICI Securities

Honeywell Automation India (HAIL) witnessed 4.5% YoY and 23% QoQ drop in revenues to Rs6.7bn, which we believe should be due to advent of covid second wave. Company reported an EBITDA margin of 19.2% (up 100bps YoY / down 220bps QoQ) despite 340bps YoY increase in raw material costs to Rs3.3bn. Other expenses declined 26% YoY and staff expenses dipped 7% YoY due to cost-reduction measures, supporting the margins. We believe, the margin expansion was aided by reduction in travel due to covid restrictions. Net working capital increased to 51 days from 33 in FY20 due to higher receivables. Factoring-in the revenue slippage, we cut our FY21E and FY22E earnings estimates by 16.7% and 15.1% respectively. Given the rich valuation and near-term uncertainty of growth, we downgrade the stock to REDUCE (from Hold) with a revised target price of Rs36,942 (earlier: Rs40,679).

- Downgrade to REDUCE on rich valuation and working capital stretch: The long-term secular growth drivers in process automation, diversification towards building and cyber security, and constant improvement in the company's technical portfolio, will drive HAIL's long-term growth. However, given the near to medium term uncertainty and the increase in receivables impacting working capital, we downgrade the stock to REDUCE. In view of the outsourcing nature of the export segment, the multiple we assign to it is different from the one to the domestic segment. We assign a multiple of 65x FY23E earnings to the domestic business and 30x FY23E to the export business, thus arriving at an SoTP-based target price of Rs36,942. We assume the percentage contribution of exports in the earnings to be similar as in the revenues. We have rolled forward our target multiple to FY23E earnings from Sep'22E earnings.

- 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, HAIL will be a key beneficiary of the same. Company is also a key player in building and various infrastructure automation, hence can benefit from government spending towards the same.

- 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 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. The segment is expected to witness healthy growth given the general focus on security and safety.

Shares of HONEYWELL AUTOMATION INDIA LTD. was last trading in BSE at Rs.41619.2 as compared to the previous close of Rs. 42867.75. The total number of shares traded during the day was 2093 in over 740 trades.

The stock hit an intraday high of Rs. 42700 and intraday low of 40500. The net turnover during the day was Rs. 87171266.

Source : Equity Bulls

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