HONEYWELL AUTOMATION INDIA LTD (HAIL) - … Coverage on Honeywell Automation... · HONEYWELL...

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HONEYWELL AUTOMATION INDIA LTD (HAIL) - “ACCUMLATE within price band Rs 2150 – Rs 2350”

About Honeywell

Shareholding pattern as on Mar, 2011

RESEARCH ANALYSTS ANSHUMAN JAIN DIVYA KANT [email protected] [email protected]

Stock Metrics

BSE Group BSE Code Bloomberg Code

B 517174 HWA IN

Market Capitalization Rs 2189 Cr

Face Value Rs 10

Price/BV 3.93x

Book Value Rs 603.37 52 Wk High (BSE) Rs 3130

52 Wk Low (BSE) Rs 2015

CMP Rs 2369

Honeywell Automation India Ltd. (HAIL) is a leading provider of integrated automation and software solutions that improve productivity and enhance safety and security of homes and businesses. HAIL is headquartered in Pune with 8 offices all over India. HAIL is the market leader in most of the business areas it operates in.

Furthermore, it is a market leader in Electronics-Instrumentation and Process Control equipment industry.

The company`s main products are distributed control systems, building control systems and smart transmitters.

HAIL is the only company in India in the field of Industrial Automation and Control to be awarded ISO 9000 certification. HAIL's manufacturing facility is well equipped to provide customers with value-added contract manufacturing services.


HAIL a Delisting Candidate

Honeywell International Inc., the ultimate holding company, through its 100% subsidiary, Honeywell Asia Pacific Inc. hold majority of shares in HAIL (81.24 %). As per GOI listed companies are required to maintain a minimum public shareholding of 25%. However, in case of HAIL public shareholding is 18.76%.

We believe that management is not looking forward to dilute its stake of ~6.24% and have stake of 75 % going

forward. Thus MNCs like HAIL as per new public holding norm triggers delisting hope going forward

Business Segments

HAIL’s Business comprises of 5 Business Segments

v HPS business serves core industrial sectors of Refining, Oil and Gas, Pulp and Paper, Metal and Cement

etc.

v HBS business provides solutions and services for facilities such as Commercial and Industrial Buildings, IT and ITES industry, Hospitals, Hotels, Airports, and Mass Rapid Transit (MRT) etc.

v ECC business via multi channels and multiple brands, offers environmental and combustion products

and solutions to commercial, hospitality and industrial segments v S&C– This business provides various sensors and switches to manufacturing and automobile industry.

This business serves primarily OEMs in various manufacturing industries such as auto, medical instrumentation, IT, etc.

v GS – This segment caters to the manufacturing and engineering services needs of Honeywell along with

some other non Honeywell customers across the globe, leveraging the cost, skills and knowledge arbitrage.


Business Segment Performance

Honeywell Process Solutions v This segment includes Field Instruments, Programmable Logic Controllers, Distributed Control

Systems, Emergency Shutdown Systems (ESD), Quality Controls Systems (QCS), Advanced Software Solutions and various value added services Performance

v Overall this segment performed well in 2010. Process Solutions offers its Solutions and Products in 4 modes. Each of the modes i.e. New Construction, Advance Solutions, Life Cycle Services (LCS) and Field Solutions grew in order booking in 2010. Key Orders & Customers

v The growth in order booking in 2010 involved some very important green field project wins. The major wins include one Greenfield Refinery Project (Paradip) from IOCL, one Petrochemical project from ONGC, two large Terminal Automation projects from HPCL and HMEL, in addition to several mid size orders from Bhushan Steel, JSPL, L&T, Tata Steel etc Outlook

v Further higher threat and perception for security and safety and focus of energy conservation will lead to growth potential in Industrial security and safety applications where HAIL has a strong product/solution portfolio. HAIL continues to be the beneficiary of Honeywell HPS global investment in technology in new Products and Solutions, which will help HPS India to make its competitive position stronger in CY2011&CY2012

Programmable Logic Controllers Quality Controls Systems


Business Segment Performance

Honeywell Building Solutions

HBS provides building solutions that are operationally intelligent and energy efficient. As part of its intelligent buildings suite, HBS provides building management systems (HVAC, Lighting and Utilities monitoring and control), fire detection and alarm systems, access control systems, video surveillance systems, integrated security systems and integrated building management systems. Honeywell Building Solutions (HBS) is one of the largest and most technically skilled Building Automation Solutions providers in the Indian Subcontinent. As part of its energy efficiency promise HBS provides energy management services, energy retrofits and energy performance contracts.

Performance

v HAIL continued its consistent track record of performing well in CY2010 and won several contracts and

Key Orders & Customers

v Major wins / customers include Tata Consultancy Services, Cognizant Technology Solutions, Chennai Airport, Mumbai Airport, ICICI Bank, IOCL, Nokia, Bharti Airtel, TCL, Dr. Reddy’s Laboratories and Jindal Saw

Outlook

v Segment is expected to perform well in CY11 & CY12

Video Surveillance Systems CCTV


Environment & Combustion Control

Major Customers

v Some of the major wins for the company being ITC Grand Chola, JW Marriot – Bangalore, Royal Bank of Scotland, Naya Raipur Development Authority (NRDA), Delhi International Airport Limited (DIAL) and Delhi Metro Rail Corporation.

New Product Launches

v Solar water heaters launched in early 2009 registered good sales numbers from residential sales and key commercial projects in 2010 and are expected to show strong growth in 2011.

Outlook & Performance Drivers

v Government policies for encouraging renewable energy solutions are helping in leveraging large commercial opportunities in ECC space. Consolidation of Commercial Construction and Real Estate segment, along with urbanization of Tier 2 and 3 cities, would drive growth of the diversified product portfolio for the business in 2011

Solar Water Heaters


Sensing & Control Increase Focus on Business

v HAIL to increase focus on this segment which has lead to expanding of Electromechanical Sensing and Test and Measurement lines of businesses which has contributed significantly to the growth Industry Catered

v Power Generation Equipment, Process Instruments, Off-highway/ Construction Equipments, Military/Aeronautical Industries, Educational and Research Institutions. Growth Drivers

v Firming demand in transportation segments and diversification in other verticals and applications will help the business to pursue growth in 2011.

Basic Switches Global Services

v GS business offers engineering services and product manufacturing, solutions and services to overseas requirements of Honeywell and other customers and is expected to grow moderately. HAIL has adopted GS has adopted Honeywell Operating Systems (HOS), which is designed to improve service performance and cost optimization, thereby representing a holistic approach to operational excellence.

Engineering Services


Order Book

11951350

900

0

200

400

600

800

1000

1200

1400

1600

CY 09 CY 10 Apr-11

Order Book(Rs in Cr)

Order Book(Rs in Cr)

The order book has grown by 13% on YOY basis. During the year CY'10, the company was able to grab many domestic green field projects in Power and Oil & Gas sector unlike CY'09. Further during the year, the Parent company had also won some green field projects, the execution of which will take place during CY'11. The

current order book of the company as on Apr 2011 is ~ Rs 900 Cr

Segmental Break up of Order Book Geographical Break up of Order Book (Process Solutions/Engineering Contracts)

75.00%

25.00%

Process Solutions/Engineering Contracts

Others

70.00%

30.00%

Domestic Exports


Sales & Profits –An Overview

644

8681002

1175

1355

58 65 82 133 105

0

200

400

600

800

1000

1200

1400

1600

CY06 CY07 CY08 CY09 CY10

Sales (Rs in Cr)

Profit(Rs in Cr)

Total Sales CAGR ~ 20.4% over last 4 years

Total PAT CAGR ~ 16% over last 4 years

Total Sales Growth of 15% over CY09 complemented by strong growth in domestic business & contract manufacturing however slowdown in exports impacted the sales growth to a certain extent. The PAT in CY 10 was muted as compared to CY 09 primarily due to an unfavorable revenue mix, competitive pressure on margins, increased employee cost and corporate allocations. However this is expected to improve in coming years.

Export Sales

159 184

422486 505

0

200

400

600

CY06 CY07 CY08 CY09 CY10

Sales (Rs in Cr)

Sales (Rs in Cr)

~ 4% Export sales growth in CY10 over CY09 engineering exports were muted while contract manufacturing

business and hardware exports were the growth drivers.


HAIL has a consistently improving trend of EPS ……

65.6173.62

92.57

150.19

118.83126.54

170.12

0

20

40

60

80

100

120

140

160

180

CY06 CY07 CY08 CY09 CY10 CY 11 E CY12 E

EPS (Rs)

EPS (Rs)

EPS subdued in CY10 since Challenges in exports volume originating from Non Honeywell and Honeywell customers due to adverse order mix. There is Aggressive competition emerging from other developing nations. Corrective steps and action undertaken by company will lead to improvement in this scenario going

forward.

1.57 1.541.78

2.1 2.092.2 2.22

0

0.5

1

1.5

2

2.5

CY06 CY07 CY08 CY09 CY10 CY11E CY12E

Current Ratio

Current Ratio

HAIL is able to maintain its Current ratio & co is in sound position to meet its current liabilities and maintain its growing need of working capital.


Honeywell One stop Solution….

v One of the leaders in integrated automation & software solutions

v Company provides knowledge based process solutions to various process based Industries

v Best in class project delivery

Example of one stop solutions in Paper Industry

v Co provides solutions for Improving Plant Performance

v Various ways of improving paper recovery

v Solutions for Better wood pulp & waste paper management logistics

v Reduction of power & other utilities

Diversified business mix combat revenue cyclicality…….

HAIL diversified its business in 5 major business segments viz. Process Solutions, Building Solutions,

Environment & Combustion Control, Sensing & Control and Exports Business Group. The company is a

market leader in most of these business segments and operates in the core business sectors in India like,

Infrastructure, Petrochemicals, Refining, Chemicals, Mining & Metals, Automobiles and Hospitality. Thus, a

well-diversified business activity helps the company combat revenue cyclicality.


Key Triggers….. v HAIL has produced good set of numbers Q1 CY’11, where net sales grew by 26% to ~ Rs. 354 Cr. This is

primarily due to execution of green field project execution in Q1CY11 as compared to no green field execution in Q1CY10

v During the year CY'10, the company was able to grab many domestic green field projects in Power and Oil & Gas sector unlike CY'09. Further during the year, the Honeywell had also won some green field projects the execution of which will take place during CY'11.

v In refinery business, after the Paradip refinery no new green field refinery is coming up. But on Oil and Gas

sector, i.e. upstream, downstream, midstream and on the distribution i.e. retail side, many green field projects are coming up and thus order pipeline and orders for the future have a clear visibility. Power automation side is stable.

v The green field orders are also very competitive orders and given the raw material prices, it would be very

difficult to maintain the margins. However, these green field orders are a package where there is initially execution and then service revenue attached to it. We are confident that the whole package i.e. including service revenues will have better margins.

v The corporate expenditure allocation to the company depends on promoters since the expenditure like

R&D, brand building, strategic planning, various audits etc incurred at the group level and then a reasonable share of the expenditure is allocated to Honeywell India. While the allocation will vary depending upon the actual expenditure, going forward it would be at an estimate~3.5 -4.5% of net sales every year.

Investment Rationale

v Strong Delisting Candidate: Honeywell is a very strong delisting candidate since they can go completely private & delist themselves. Also there is less probability that the company will reduce its current stake of 81.24 % to 75%. Thus, the promoters will have to ensure an open offer and undertake reverse book building process and will lead to highest buyout price possible.

v Strong Parentage : HAIL enjoys a strong parentage of Honey Well Plc which is a Fortune 100 global diversified technology and manufacturing leader. Each of the company’s four businesses - Aerospace, Automation and Control Solutions, Transportation Systems, and Specialty Materials enjoy global standards and are well accepted by customers world wide

v Government Spending: The fortunes of HAIL are very closely related to continued government spending

on key infrastructure projects like Roads, Airports, Mass Transit Systems, Energy Conservation Initiatives and Electronic Security will help volume growth opportunities in Buildings Solutions business going forward. The contribution of Indian electronics and electrical industry to GDP is phenomenal and the industry offers overwhelming opportunities for electronic equipments manufacturing. Electric equipment industry contributes over 2 % of GDP which is expected to rise to around 12 % in 2015


v Electronic Market: The electronics market in India is forecast to touch $125 billion by 2014 from current size of $45 billion. Automation suppliers are expected to greatly benefit from the power, oil and gas and pharmaceutical sectors growth. Automation is now also important for medium and small size units and they are driving the growth for the sector.

v Debt Free Status: HAIL enjoys a debt free status and is a cash rich company having balance of ~Rs 211 Cr

CY10

v Strong Trend in Automobile Segments: Automobile segment had robust sales in CY10 & the spillover effect are seen in CY11 , continued strong demand in Tier I & II Cities and the uptrend in both have kept the industry outlook and opportunities intact for the industry.

v Track Record: HAIL has shown resilience even there is a downturn in the engineering industry it has kept growing at healthy pace even though most of its competitors are struggling even in CY09 when the world was in recession it performed reasonably well.

v Huge Cash Generating Machine: HAIL has generated average cash ~Rs 85 Cr (CY06-CY10) as against average profit ~ 88 Cr(CY06-CY10).Thus co is a cash rich and has ability to generate healthy cash flows to meet investment and financing needs thereby not relying on external sources of funds. The co has cash of Rs 211 Cr as on 31st Dec,2011 which works out to be Rs 238.60/- per share

Risk & Concerns v Promoter Dependent: HAIL is largely dependent on the promoters i.e. Honeywell International Inc. Sales

accounted for ~ 33% in FY10 & 36 % in FY09 while the sales to Global Services (HAIL’s most profitable segment) accounted for 90 % in FY10 & 92 % in FY09.

v Pricing Pressures: Pricing pressures on sales of goods and services to Honeywell or a reduction in the

volume or change in the mix of orders or sales to Honeywell can be expected to have a material adverse impact on the revenues and profits of the Company.

v Volatility of exchange rates continues to be a concern due to large exposure to foreign currencies that the on account of imports as well as exports

v Price pressure due to new competition from other developing nations.

v Green field refining sector are declining and company is heavily relying on continuous investments made in Power and Gas sectors.

v Any economic slow slowdown in the industrial growth along with slowdown in the Capex could have

an adverse affect on the fortunes of the company. The fortune of the engineering companies like HAIL is directly linked to economic cycle.

v Rising Interest rate scenario would delay/put on hold of the projects by the company’s customers could hamper the growth


Financials - Income Statement – (Rs. in Cr)

Particulars CY10 CY 11 E CY 12 E

Net Sales 1354.71 1511.32 1813.59

Other Operating Income 1.08 2.5 3

Total Income 1355.79 1513.82 1816.59

Expenditure

a) (Inc)/dec. in stock in trade -1.56 -3.15 -16.39

b) RMC 686.82 740.55 906.79

c)Purchase of traded goods 113.48 141.85 181.56

d) Employees cost 221.53 252.45 294.10

e) Other Expenditure 191.61 232.52 249.54

Total 1211.88 1364.22 1615.60

EBIDTA 143.91 149.60 200.99

Interest 0.08 0 0

Depreciation 12.9 14 15.4

Other Income 7.97 11.60 14.93

PBT 138.9 147.20 200.52

Tax 33.85 35.33 50.13

PAT 105.05 111.87 150.39

Equity 8.84 8.84 8.84

EPS (Rs.) 118.83 126.54 170.12


Consolidated Balance Sheet – (Rs. in Cr)

Liabilities CY10 CY11E CY12E Share holder’s fund

Share Capital 8.84 8.84 8.84

Reserve and Surplus 524.54 626.07 766.12

Loan funds - - -

Total 533.38 634.91 774.96

Assets

Fixed Assets

Gross Block 146.8 165.68 187.68

Less Depreciation 71.49 86.89 102.29

Net Block 75.31 78.79 85.39

Add: Capital Work in progress 0.88 0 0

(A) 76.19 78.79 85.39

Deferred Tax Assets (B) 30.89 36.62 42.38

Current Assets, Loans and Advances

Inventories 78.82 81.97 98.37

Sundry Debtors 321.51 358.68 430.41

Contract in Progress 101.03 58.37 40.87

Cash and bank balances 211.19 338.58 464.83

Other Current Assets 2.88 0 0

Loans and advances 102.27 116.59 142.24

Total Current Assets (C) 817.7 954.19 1176.72

Less Current Liabilities and Provisions (D) 391.4 434.69 529.53

Net Current Assets E(C-D) 426.3 519.5 647.19

Total (A+B+E) 533.38 634.91 774.96


Cash Flow – (Rs. in Cr)

Cash flow from operating activities CY10 CY11E CY12E Net Profit before tax 138.9 147.20 200.52

Depreciation 12.9 14 15.4

Interest -7.88 0 0

Profit/ Loss on sale of Assets 1.74 0 0 Unrealized Exchange Gain/ Loss on restatement of Foreign currency Assets and Liabilities

-0.3 0 0

Operating profit before WC changes 145.36 161.20 215.92

Adj. for WC changes

Add:(Inc)/Dec. in Inventories 1.72 -3.15 -16.39

(Inc)/Dec. Trade receivable -145.81 -37.17 -71.74

(Inc)/Dec. Loans and Advances - -14.32 -25.65

Inc/(Dec.) Trade payable 86.67 43.29 94.85

Cash generated from operations 87.94 149.85 196.99

Less: Direct taxes paid -42.3 -50 -75

Net Cash generated from operating activities (A) 45.64 99.85 121.99

Cash Flow from Investing Activities

Purchase of Fixed Assets -15.77 -18.88 -22

Sale of Fixed Assets 0.23 0 0

Inter Corporate Deposits (NET) 80.4 52 32

Interest Received 5.15 4.75 4.6

Net Cash used in investing activities (B) 70.01 37.87 14.6

Cash Flow from Financial Activities

Inc./(Dec.) in borrowings -0.12 0 0

Interest paid -0.08 0 0

Dividend Paid -10.34 -10.34 -10.34

Net cash recd. From Financing Activities (C ) -10.54 -10.34 -10.34

Net Inc/(Dec) in Cash & Cash Equivalents (A+B+C) 105.11 127.38 126.25

Cash & Cash Equivalents - opening balance 106.1 211.2 338.58

Cash & Cash Equivalents - closing balance 211.2 338.58 464.83


IGSL Analysis

v Sector: Fortunes of engineering sector based on industrial capex cycle. We believe that H2FY11 there will be pickup in industrial spending by government as well as corporate & easing of interest rates and high commodities will help in gaining of momentum.

v Sweet Spot: HAIL is in a sweet spot and one stop solution for corporate in the integrated automation & and process solutions industry. It helps the companies in improving efficiency and reduction of overall costs

v Sales: The top line of the company is growing consistently and will be able to sustain even in CY11& CY12.The top line will be impacted to certain extent in CY11 due to slow down in CAPEX in CY11 & high interest cost but H2CY11 it is expected to perform better. The sales are expected to rise ~11.5% in CY11 & 20% in CY12

v Operating Margins: HAIL operating margins are expected to remain in the average of 10.53% (CY10 -CY12E) and seem decent to meet its fixed costs

v EPS growth: The EPS is expected to grow at a CAGR growth rate of 19.6% from Rs 118.83 in CY10 to Rs 170.12 in CY12E and is healthy

v ROCE: HAIL is likely to maintain an average ROCE of ~25 % (CY10-CY12E) indicates the efficiency and profitability of a company's capital investments.

v Promoter Holding: Higher the promoters holding better the confidence among small & retail investors. The promoters hold more than 81 % and the stake dilution in near future also looks not a possibility

v FII holding : The stock has a low FII holding 0.53 % hence low volatility in stock prices.

v Liquidity: HAIL is an illiquid stock in nature with average 52 weeks average daily volume of 1875

shares. Hence recommended to accumulate in small quantity in many trades

v Debt: The company is virtually debt free and has been able to sail through recession & downturn with practically lower or negligible debt costs despite lower profits in CY10 as compared to CY09


DELISTING ON THE CARDS……… PROMOTER HOLDINGS AS ON 31st Mar, 2011

Name of the Shareholder No. of Shares Shares as % of Total No. of Shares

Honeywell Asia Pacific Inc 7,182,475 81.24 Total 7,182,475 81.24 MUTUAL FUND HOLDINGS AS ON 31st Mar, 2011

Name of the Shareholder No. of Shares Shares as % of Total No. of Shares

Birla Sun Life Trustee Company Pvt Ltd A/c Birla Sun Life Tax Relief 96

157,500 1.78

Total 157,500 1.78

Inventure Research view…… Honeywell Automation India Ltd possibly will join the list of multi-national corporations (MNCs) delisting on

local bourses after the Indian government announced that all listed entities should have a minimum 25% public

float. HAIL is looking to speed up the process of delisting as they do not want to sell more stakes under the new

norms. Honeywell Automation India is awaiting a final nod from their parent before unveiling de-listing plans.

MNC like HAIL are consolidating their shareholdings in Indian subsidiaries as they operate in a key emerging

market now and also offers a competitive production base in the region. Delisting eliminates potential conflict of

interest with minority shareholders in key strategic decisions while providing fair value to minority

shareholders as well.


Valuations At current market price of Rs 2369/-, the stock is trading at CY11E earning 18.72 & 13.93x of CY12 earnings. We

expect EPS of Rs 126.54 in CY11E & Rs 170.12 in CY12E.

Furthermore, Promoters hold 81.24 % of shares in the company and since the company is not looking for

diluting the stake makes it an “Attractive Delist Candidate” in near future

Automation Industry fortunes are closely linked to Industrial production and anticipated growth in the

commercial & infrastructure construction. We expect government spending to pick up in key areas like roads,

airports and power sector which offers immense opportunities to HAIL

We recommend to “Accumulate” the stock in small quantities since it’s illiquid in nature within price band of Rs

2150/- to Rs 2350/-

We Recommend “Buy” with a 1 year referral Indicative Price Target of Rs 3400 - 3600.


For Any Queries please feel free to contact our Institutional Team

Names Designation E-Mail Id. Contact Nagji Rita CMD - - Sales Ravinder Kasliwal Head Institutional Sales [email protected] 40751565/66 Dealing Shiv Damani Institutional Dealer [email protected] 22723797 Vinit Rita Institutional Dealer [email protected] 40751565/66 Rashda Ainapore Institutional Dealer [email protected] 40751565/66 Research

Anshuman Jain Research Analyst [email protected] 40751515 * 562

Divya Kant Research Analyst [email protected] 40751515

Pankti Shah Research Analyst [email protected] 40751515

Sheetal Nirmal Research Analyst [email protected] 40751515

Sanjeev Haria Research Analyst [email protected] 40751515

Sibayan Banerjee Technical Analyst [email protected] 22723797

Ashok Patel Technical Analyst [email protected] 22723797 Madhu Patel Technical Analyst [email protected] 22723797

Disclaimer

Inventure Growth & Securities Ltd has prepared this Document. The information, analysis and estimates contained herein are based on Inventure’s assessment and have been obtained from sources believed to be reliable. Neither Inventure Growth & Securities Ltd nor any of its employees or associates accepts any liability whatsoever direct or indirect that may arise from the use of information herein and shall not be responsible for its completeness and accuracy. It is not an off er to sell or a solicitation to buy securities. This document is for circulation only

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