Honeywell Automation (HAIL) has reported a subdued set of numbers for Q1CY07. Operating margins are lower on account of higher raw material costs and employee costs. The stock is trading at 20x CY07 earnings and we do not see any meaningful upside from these levels. In view of this, we are revising our recommendation to REDUCE.
Highlights
Order backlog of Rs.7.0 bn, equivalent to ten months of sales.
Honeywell expects to grow its revenues at 20-22% accompanied by stable margins
Capex of Rs.300 mn over the next two years
Result Highlights
Revenue for the quarter has risen 22% YoY to Rs1.9 bn. Demand for the Honeywell's products and services are driven by an increasing share of automation in the Indian industry. Also, fresh capex in core sector industries like oil and gas and power, among others, are also resulting in healthy growth in revenues.
Operating margins for the quarter have declined 190 bps to 11.8%. Margin contraction has been on account of higher material cost pressures and wage costs. Margin contraction is partly on account of higher revenues from Building Solutions, which has relatively lower margins.
Outlook
We are maintaining our earning estimates for the company. At the current price, the stock is trading at 19.8x CY07 earnings of Rs.83.1 per share. Given our target price of Rs.1800 on the stock and limited upside therein, we are revising our call to a REDUCE.
