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Published on 7/08/2020 9:26:32 AM | Source: Yes Securities Ltd

Buy Honeywell Automation India Ltd For Target Rs.36,310 - Yes Securities

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Highlights

* HWA reported resilient set of results with beat on all fronts. 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 beat (+54% vs our estimates) led by, 1) Marginal impact of lockdown on execution, 2) Gross margin expansion & 3) Better cost control. PAT came in at Rs980mn, down 14% yoy.

 

Our View

*  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.

* HWA would be able to mitigate the slowdown risk arising out of crude prices volatility through its diversified business exposure. Strong installed base of HWA in core sectors would aid higher services sales. Its parent has set a margin target of 25% by CY25, and we believe HWA too will follow a similar trajectory in margins, given the high entry barrier & access to parent’s superior technology.  

 

Valuation

* During CY07‐FY15, HWA traded at average 1‐yr forward P/E multiple of 21x & delivered average adjusted RoE (ex‐cash)/ Core RoIC of 29%/22% respectively. 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 valuations. Retain ‘BUY’ with TP of Rs36,310 at 50x FY22E EPS.

 

Risk To Our Call

* Delay in revival of short cycle orders.

 

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