YES Securities is bullish on Honeywell Automation India has recommended buy rating on the stock with a target price of Rs 36,310 in its research report dated November 10, 2020.
YES Securities' research report on Honeywell Automation India
HWA once again reported resilient set of results with beat on EBITDA (+17% vs our est.) with margin at 19% (+80bps yoy). Revenues came in at Rs7.6bn, up 3.2% qoq & down 8.2% yoy. Gross margin was at ~50.4%, expansion of ~151bps yoy led by better sales mix. HWA continues to focus on rationalization of discretionary spends, productivity drives etc. Other income declined by 45% yoy to Rs144mn (-49% vs our est.). However, lower tax expenses (-19% yoy) negated the impact of decrease in other income partially. Tax rate stood at 25.7% vs 27.8% in Q2FY20. PAT marginal beat (+4% vs our estimates) & it came in at Rs1,1bn, down 10% yoy. We expect domestic revenue CAGR of 13% over FY21E-23E led by, i) Capex on Data Center, Metro, Airport & Smart Infra projects, ii) Focus on double digit connected software growth, iii) Major beneficiary of India’s move to build energy security, drive gas-based economy by encouraging digital solutions & iv) Medium term outlook strong for Pharma & Chemical sectors. Export revenue CAGR of 20% over FY21E-23E driven by, i) Business integration with Parent’s entities by leveraging cost efficient services, ii) New portfolios, offerings and geographic expansion supporting Honeywell's global growth agenda & ii) Supply chain localization. We like HWA based on its ongoing product portfolio upgradation, focus on software industrial business model, faster adoption of automated solutions by domestic market post Covid-19 episode & relentless execution on cost control.
Average OCF/EBITDA ratio was strong at 0.67x (one of the best in industry) during FY15-20, expect it to ~1x by FY22E. HWA’s continued earnings outperformance among its peers, asset light tech model & robust return ratios (RoE ex-cash/ RoIC at 71%/58% in FY20) justify its valuations. Retain ‘BUY’ with TP of Rs36,310 at 50x FY22E EPS.
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