Buy Honeywell Automation India; target of Rs 36,310: YES Securities

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YES Securities' research report on Honeywell Automation India

Honeywell Automation (HWA) reported resilient set of results with beat on all fronts. PAT beat (+54% vs our estimates) led by, 1) Marginal impact of lockdown on execution, 2) Gross margin expansion & 3) Better cost control. Revenues came in at Rs7.4bn, up 4.5% qoq & down 14% yoy. Gross margin was at ~51%, expansion of ~200bps yoy led by better product mix. EBITDA stood at Rs1.3bn, down 24% yoy with EBITDA margin of 17.4% (-231bps yoy). HWA is focusing to offset revenue drop by managing its variable cost structure, rationalization of discretionary spends, productivity drives etc. Lower tax expenses (-45% yoy) negated the impact of decrease in other income (-6% yoy) & increase in depreciation cost (+36% yoy). Tax rate stood at 25.9% vs 35.4% in Q1FY20. PAT came in at Rs980mn, down 14% yoy.

Outlook

However, post FY15, HWA’s valuations got a significant re-rating (traded at average 1-yr forward P/E multiple of 45x) as it had strong profitability growth, free cash flow generation with average adjusted RoE/ Core RoIC of 51%/39% respectively over FY15-FY20. HWA’s continued earnings outperformance among its peers, asset light tech model & robust return ratios justify its premium valuations. Retain ‘BUY’ with TP of Rs36,310 at 50x FY22E EPS.

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