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

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.

Outlook

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.